Gross debt service ratio
Your GDS ratio is based on your monthly living expenses (mortgage principal and interest, property taxes and heating and condo expenses, if applicable), divided by your gross household income (calculated on a monthly basis). Suppose, for example, that you have a gross family income of € 100,000 per year. If your new home costs you $3,000 a month, you would have a GDS ratio of 36%. According to the Canada Housing and Mortgage Corporation (CMHC), your GDS ratio should not exceed 39%.
Total Debt Service Ratio
The other ratio used to calculate affordability is your TDS ratio. This ratio takes the above living expenses and adds up your credit card interest, car payments, and other borrowing costs, then divides them by your gross household income (calculated per month). For example, if your household earns $100,000 per year, your housing costs are $3,000 per month, and you spend $500 per month on other debts, you would have a TDS ratio of 42%. To keep the house affordable according to CMHC, your TDS ratio should not exceed 44%.
Mortgage affordability versus your maximum purchase price
There is a difference between how much you can borrow for your mortgage and the maximum you can (or should) spend on a home.
If you want to determine your maximum purchase price, you also need to factor your deposit into your calculations. For example, if you have a $25,000 down payment and are approved for a $475,000 mortgage, you should be able to purchase a home priced at $500,000. (Don’t forget to factor in all the other costs associated with buying a property in Canada). However, with another $25,000 saved in the bank (for a total down payment of $50,000), your maximum purchase price would rise to $525,000, even with the same mortgage. Remember, there are government regulations that dictate the minimum you should have as a deposit.
Finally, keep in mind that your future home will come with many costs, including some that are not included in the mortgage affordability calculations. Make sure that the amount that a mortgage lender is willing to lend you corresponds with what you want to pay monthly. Before applying for a mortgage, make a detailed list of all your expenses, including things like your groceries, bills, and transportation costs, to make sure your future mortgage payments fit well within your budget.
How can you increase the affordability of your mortgage?
If you find that your max affordability is lower than you expected, here are some reasons it could be — and what to do about it.
GDS ratio: If your GDS ratio is limiting the affordability of your mortgage, you need to increase your gross household income. TDS Ratio: If it’s your TDS Ratio, the likely culprit is existing debt. Focus on paying off your credit card balances or car loans to increase the affordability of your mortgage. Ask a co-signer: If a family member co-signs your mortgage, their income will be added to your application, helping you to pay more mortgage. Please note that if you fail to make your payments, your co-signer is responsible for repaying the debt.
If your overall house-hunting budget is your concern, you have another option: Having a larger down payment will expand your budget, without increasing your mortgage. If you’re having trouble saving for a larger down payment, consider accessing $35,000 in RRSP funds through the Home Buyers’ Plan (if you’re buying a home for the first time), through the First-Time Home Buyer Incentive (also for starters on the housing market) or asking a family member for a monetary gift.
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How can you lower your mortgage payments?
To make sure that mortgage payments fit comfortably within your budget, you can also work on lowering your monthly payments to the same mortgage amount.
This post MoneySense Toolkit: The Mortgage Affordability Calculator
was original published at “https://www.moneysense.ca/spend/real-estate/mortgages/mortgage-affordability-calculator/”
