Can I afford a Mortgage?

January 23, 2013

can you afford a mortgageAssuming a mortgage is one of the biggest financial commitments you will make in your lifetime. It’s important to do your research before making the decision – to find out if you can afford a mortgage.

As a general rule of thumb, lenders will qualify individuals based on two calculations: Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS).

Gross Debt Service Ratio

GDS ratio is the percentage of your gross monthly income that it will take to cover your monthly housing costs. This includes mortgage payments, property taxes, heating costs, and 50% of your condo fees if applicable. The industry standard in Canada for GDS is 32% – which you should not surpass.

For example:
Gross Annual Income: $50,000
Gross Monthly Income: $4,166
32% GDS: $1,330

Your mortgage payments, taxes and heating costs per month should not exceed $1,330 (according to the GDS ratio).

Total Debt Service Ratio

TDS deals with all costs in your GDS calculation plus all of your debt obligations. These will include all credit lines, automobile loans and leases, student loans, alimony, child support, etc. Lenders will also include credit lines that are not used or at a $0 balance as well, as there is a chance that you may collect balances in the future. Payments such as RRSP contributions and insurances are not included as these can change based on preferences. The TDS ratio is particularly important to creditors, it helps project if you can afford the payments.

Consider the following scenario as an example:

Gross Annual Income: $50,000
Gross Monthly Income: $4,166
Monthly Mortgage Payments, Property Taxes, Heating Costs = $ 1,275
Monthly Car Loan of $150 + Monthly Line of Credit Payment of $225 = $375
GDS = 30.60%
TDS= 39.60%

With the above example, you would qualify for a mortgage with most lenders. In some cases where the ratios are slightly higher than industry guidelines, exceptions can be made. Lenders also look at your credit score, assets, and overall application to qualify you. Mortgage underwriters typically evaluate a mortgage application with the entire “picture”. Another way to lower your GDS and TDS ratios is by reducing your debts, increasing your income, and putting a larger down payment on the property when your purchase.

Take the time to do calculations and be sure to consider your personal situation and lifestyle to make sure you can afford a home. Once you’ve decided to buy a house and obtain a mortgage, shop around using online quoting sites to get better mortgage rates.