As an individual who is thinking about buying a home, it is natural to ask the question “How much mortgage can I afford?”. For most Canadians, their home is one of the largest investments that they will ever make, and getting the mortgage right is key to ensure that this investment is a successful one.
When answering this question, there are several key factors that Canadians must consider to understand how much mortgage they can afford. These factors include income, debts, and lifestyle choices, and understanding how each of these factors impacts a mortgage’s affordability is crucial.
First, let’s look at income. Your income is one of the primary factors that determine how much mortgage you can afford. Lenders use two ratios to determine your affordability, the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio. The GDS ratio measures the percentage of your gross income that goes toward housing costs, such as mortgage payments, property taxes, and utilities. Most lenders in Canada use a GDS limit of 32%, meaning that your housing costs cannot exceed 32% of your gross income. The TDS ratio is the total of all your debts, including housing costs, compared to your gross income. This ratio includes your car payments, credit card bills, and other loan payments, and lenders typically limit this ratio to 42%.
Next, consider debts. When calculating your debt load, it’s essential to include all outstanding debts, not just your housing costs. To determine your TDS ratio, include any credit card balances, personal loans, car payments, or other outstanding loans. High levels of debt can decrease the amount of mortgage that you can afford. For this reason, many lenders recommend that you pay off as much of your debt as possible before applying for a mortgage.
Lifestyle choices are also critical when calculating your affordability. Do you have other expenses or obligations, such as children’s education or childcare costs, that impact your finances? Consider all expenses that will affect your budget when deciding how much mortgage you can afford.
It is also crucial to take into account the current housing market and your credit score. The interest rates on mortgages in Canada were at historic lows for some time, making it a great time to buy a home. However, these days, they are significantly higher. It is crucial to monitor these rates and take them into consideration when planning your purchase. In addition, a high credit score can help you secure a more favourable interest rate, and a better mortgage overall. Checking your credit score ahead of time and making any necessary improvements can help ensure that you are able to secure the best mortgage rate available to you.
Overall, there is no single formula for calculating how much mortgage you can afford. While the GDS and TDS ratios provide an estimate, these are only part of the picture. A comprehensive assessment of your finances is required to determine what type of mortgage you can afford comfortably.
To better understand your financial situation, it’s crucial to consider a mortgage pre-approval.