How Much Can You Afford for A New Home?
what size mortgage do I qualify for home? While hunting for a home in Canada, a rule of thumb often followed is that one can afford to spend three times his/her gross household income. However, there are many factors considered by the lender that helps to determine the maximum affordability, such as down payment you can afford to pay, how long you are planning to carry your finances and also the current rate of interest. However, down payment and mortgage to income ratio are two important calculations used by the lenders to determine the maximum affordability of the buyer.
Down payment plays a crucial role in determining how much you can afford to buy a home in Canada. The bigger is your down payment, the more you can afford to buy. As a general rule, down payment should be at least 5% of your purchase price. However, if the home is priced for $1,000,000 or more, you need to pay at least 20% of the purchase price as down payment. For instance, if your down payment is fixed as at say $20,000, the maximum home you will be able to afford, regardless of your debt service ratios, is ($20,000 / 5%) or $400,000.
Debt Service Ratio
Most lenders calculate debt service ratio to determine how much you can afford to pay each month in mortgage payments. Set by the Canada Mortgage and Housing Corporation (CMHC), total debt service ratio is everything in gross domestic service ratio plus all your payments divided by gross family income. Your total debt service ratio is required to be less than 40% for lenders to feel safe in giving you their money. Both down payment and total mortgage to income ratio Ontario are taken altogether to determine the maximum home price you can afford to purchase.
How To Calculate Mortgage To Income Ratios To Know Mortgage Affordability?
Gross debt service ratio and total debt service ratio are two important figures considered by a lender to decide whether he should grant you a loan or not. It is also essential for potential borrower to calculate GDS and TDS ratios to know how much they can afford on home ownership.
Gross Debt Service Ratio (GDS)
The gross debt service ratio is the percentage of annual income of the borrower required to pay all kinds of monthly payments associated with housing. These payments usually include mortgage principal, interest, property taxes and if you are buying a condominium, lenders will include 50% of condo fees in your GDS ratio.
In order to calculate your GDS ratio, the lender will consider your annual mortgage payments, property taxes, heating costs and 50% of your condo fees (if applicable). All these costs will be added and the result will be divided by your gross annual income to obtain gross debt service ratio. As per the industry standards, your GDS ratio must be less than 32 percent to qualify for a loan. Lenders have a few exceptions if you GDS is over 32%, but it all depends on how a lender evaluates your file.
Total Debt Service Ratio (TDS)
Total debt service ratio is the percentage of gross annual income required to cover payments related to housing as well as all other debts and obligations, including loans or the minimum payments on any credit card debt.
In order to calculate TDS ratio, a lender will add all your mortgage payments, property taxes, heating costs, 50% of your condo fees and debts and then will divide the total of your gross annual income. As per industry standards, your TDS should be less than 40 percent to qualify for the loan by the lender.
However, it is not a hard and fast rule and you may get qualified for a loan even if your GDS and TDS are slightly higher than industry standards. In such a case, lender will consider your credit history or some valuable assets to grant a loan.
How Much Mortgage Can I Afford Rule Of Thumb
Before you start shopping for mortgage financing, it is important to determine how much you can afford to spend on home ownership. Apart from purchasing a home, you need to consider the other significant expenses like heating, property taxes, home maintenance and renovation.
# Rule 1
- Your monthly housing cost should not be more than 32% of your gross monthly income. Housing cost includes monthly mortgage payments (principal and interest), property taxes and heating expenses.
# Rule 2
- Your overall monthly debt load should not be more than 40% of your gross monthly income. Your total monthly debts include the housing costs (PITH) along with all your other debt payments such as car loans or leases, credit card payments etc.
Tips To Boost Your Affordability To Buy A Bigger Home
- The bigger is your down payment, the bigger home you can afford to buy. If you will increase your down payment, you will be able to purchase a more expensive home.
- It is a good practice to pay off your debt as much as you can to carry a larger mortgage and buy a bigger and expensive home.
- One must also focus on improving his/her income potential to afford a larger monthly mortgage payment to afford the bigger size of the mortgage for buying an expensive home.
- One can also apply to a spouse, legal partner or any other person who can guarantee their mortgage to afford a more expensive home.