What can you afford?
There are two major ratios a Lender will use to calculate the amount you can pay for a house. Once that amount is found, you should ask for a written commitment from the Financial Institution. The two ratios are: GDS (Gross Debt Service) and TDS (Total Debt Service). The maximum percentage of your GDS is 30% and the maximum percentage of your TDS is 40%.
Example of GDS
| A family unit has a gross income of $70,000.00 per year (before tax) |
$70,000.00 |
| Multiplied by 30% GDS |
$21,000.00 |
| $21,000.00 divided by 12 months |
$1,750.00 |
Example of TDS
If the same family unit also had a monthly car payment of $400.00, and a credit card payment of $200.00, the financial portrait would be quite different.
| Gross income |
$70,000.00 |
| Multiplied by 40% TDS $28,000 divided by 12 months |
$28,000.00 $2,333.33/month |
| Minus the monthly expenses ($400 + $200) |
$600.00 |
| Balance |
$1,733.33 |
The balance amount is the maximum monthly payment that would be used to qualify the family unit. This amount would include the property taxes, the mortgage payments and 50% of the condominium fees, if applicable.
In the above scenario…
If your family unit is contemplating a property with $3,200.00 yearly taxes ($266.66 per month) and no condominium fees, the bank will usually use the lowest of the two amounts (i.e. $1,733.33). You would be allowed $1,733.33 – $266.66 = $1,466 approximately for the mortgage payment. At 6% amortized over 25 years and a 10% down payment, this means you qualify for a mortgage of $270,832 or a house of approximately $300,000.
The two ratios (GDS & TDS) should not change, but other requirements may be imposed by the Financial Institution you deal with. You have to fully understand the implications for “YOU”. There might be some other dreams and project YOU WANT TO REALIZE which do not appear in this equation (saving for retirement, travel, kids, etc.). To be in a COMFORTABLE ZONE, you should have a discussion with your Lender. The bottom line is, how much monthly commitment DO YOU feel comfortable with?
The other limiting factor for the financial institution is the amount of your down payment. You may qualify for the 5% CMHC. Keep in mind that there are programs to assist you with the down payment and initial expenses (ex. time, RRSP, land transfer tax rebate). Call/e-mail us at lbhome@lbhome.ca or your financial institution to learn more on these an other programs.
