How much mortgage can I afford? What is my maximum mortgage?
Maximum Mortgage Affordability: From the Customer’s Perspective
This question is answered best when flipped back to you – How much mortgage would you be comfortable with paying every two weeks or each month?
Everyone is in a different situation with different tastes and goals. Some people place more emphasis on leisure and travel experiences, and may not want bigger mortgage payment to interfere with this. While other people may be expecting near term income improvements, and are more comfortable with higher payments. It’s really up to you, but in any case – a formal budget of some kind should be created before the purchase.
A budget planning tool can be found just below, and can really help specify and provide a framework for the mortgage and other housing expenses (like property taxes, heating and condo fees if any). Some people are shocked to find that the monthly cost of housing can be almost double the mortgage payment itself. A few minutes of planning here can go a long way for the enjoyment of your home, and your lifestyle overall.
Alternatively, for those who are truly ‘anti budget’, a looser ‘shorthand’ budget can be created that can be broken down into two parts:
(1) Housing and other recurring expenses and savings are set to automatic payment from each pay cheque.
(2) The remainder of the money to spend, which should never be exceeded (without growing your monthly credit debt).
Either way, operating a home and a complex financial life without a budget is like travelling through a tangled jungle without a map or GPS. In fact given the importance of organized finances in living a happy life – going through life without some sort of budget is probably worse than the jungle situation.
Maximum Mortgage Affordability: From a Lenders Perspective
With your affordability comfort zone in mind, let’s switch to how lenders will look at affordability. Not surprisingly, lender comfort with payments is almost completely mathematically determined.
Lenders use mathematical formulas called the Gross Debt Service Ratio and Total Debt Service Ratio when looking at mortgage affordability. Essentially these ratios look at how much your housing and other expenses cost, compared to your Gross Income.
For Gross Debt Service Ratio (GDS), your housing related expenses cannot go over 39% of gross (before tax) income. This is calculated as:
Mortgage Expense + Property Taxes + Heating Costs + (condo fees if any)/Gross Income
The Total Debt Service Ratio (TDS) is the same as the Gross Debt Service Ratio with one addition – it adds any kind of other debt payment to the equation. Together these expenses can’t be higher than 44% of gross income (before tax), and the formula is calculated as follows:
Mortgage Expense + Property Taxes + Heating Costs + (condo fees if any) + Debt Payments (credit line, loan…): Gross Income
Calculators can be found online to help determine GDS and TDS affordability – however these are best seen as ‘rule of thumb’ calculations and a mortgage professional with more exacting mortgage origination software should be contacted to review the specific numbers and how they really add up.
GDS and TDS calculators can be seen here, provided by the CMHC:
http://www.cmhc-schl.gc.ca/en/co/buho/hostst/hostst_002.cfm – The Importance of Comfortable
Typically if your TDS is below 35% – this is considered to be a very safe and manageable number by many financial professionals.
Thinking long term, where is your comfort level for housing expenses as a % of income? What TDS does your comfort level come in at?