How much can you afford?
If you’re in the market for a new home, it’s vital that you know the maximum mortgage you can qualify for. Lenders take a number of things into consideration when trying to determine how much you can afford, such as:
- Debt service ratios, which are based on your monthly debt commitments, the costs associated with owning the home, and your income
- Your down payment
Using Debt Service Ratios to Determine Affordability
Your debt service ratios, including your total debt service ratio (TDS) and your gross debt service ratio (GDS), are set by the Canada Mortgage and Housing Corporation, and are used to gauge the highest mortgage amount your lender can offer you. The lender then combines this maximum with your available down payment to define the maximum home price you can afford.
Lenders want to make sure you can consistently make your monthly payments, and the debt service ratios help them to determine how much you can spend on housing expenses and how much can go towards servicing your mortgage debt. Gross Debt Service should be no more than 32 percent, and Total Debt Service should be a maximum of 40 percent, according to industry standards. You might be permitted to go over these limits if you have a steady source of income and good credit. You will not be approved for amounts that force your TDS or GDS above 44 percent and 32 percent respectively.
Can Maximum Mortgage Affordability be Increased?
You can take several steps to increase your maximum affordability if you’re unhappy with the results you get from our mortgage calculator:
- Pay your debts off – Ultimately this will give you the ability to carry a bigger mortgage and consequently purchase a more luxurious home. It will also make more of your income available for your mortgage payment, and lower your TDS ratio.
- Increase your down payment – This will allow you to increase your affordability and purchase a higher priced home.
- Increase your income – This tough alternative will give you enough money for a bigger monthly mortgage payment, which will increase the total amount of the mortgage you can afford to borrow and repay.
Should I Borrow at my Maximum Affordability?
You don’t have to borrow the maximum amount possible: the TDS and GDS ratios should just be used as guides. Homeowners have been using maximum portion of thier income to service their mortgage payments according to the 2013 RBC Affordability Index Survey, leaving them susceptible to interest rate hikes and job loss.
Some industry professionals have even recommended that the conventional TDS formulas be revised to incorporate a 10 percent savings cushion. This idea has increased traction and even received the nickname “Total Debt Service + Savings (TDSS) Ratio.” It’s important when determining what your maximum purchase price is going to be to ensure that you have an adequate room available in your budget to save for the future, pay down debt, and withstand job loss and interest rate increases.