How Much House Can You Afford?
Wednesday Aug 30th, 2017Share
As a home buyer, it can be hard to know how much house you can afford – especially in markets like Toronto and Mississauga where home prices have increased a great deal over the last number of months.
Before you even start looking for a home, you need to know exactly how much house you can afford – otherwise, you could spend time looking at property listings that are over and above your price range. If that happens, it's hard to see past the disappointment once you realize your expensive dream home is out of your reach.
To get an idea of what you can afford, you'll need to take the following into account:
• Your down payment
• Your household income
• Your current debts (liabilities) and your monthly payments associated with those debts
• Your estimated monthly housing-related costs, like your mortgage payment, property taxes, insurance, utilities, maintenance costs, etc.
• Your anticipated closing costs and other one-time costs, like lawyer fees, HST on a new home and moving expenses
• Your current spending practices
Essentially, you have to look closely at all of your expenses – because, no matter what, you still have to put food on your table, clothes on your back, gas in your car (if you own one) and have a little left over for fun. And, let’s not forget putting money aside for emergencies and savings too.
To help you understand how much house you can afford, there is a calculation that you can do. Here’s Barbara Sukkau, former president of the Ontario Real Estate Association, with a simple formula:
To summarize, the gross debt service ratio (GDS) is a debt service measure that financial lenders use as a rule of thumb to give a preliminary assessment of whether a potential borrower is already in too much debt.
As Barbara points out in the above video, receiving a ratio of less than 32% means that you have an acceptable level of debt. However, if you rate over 32%, then you have an unacceptable amount of debt.
Keep in mind, though, that this ratio is only a rough benchmark. The acceptance of a loan application is not solely determined by this ratio – there are a number of other factors that lenders consider too. That’s why it’s always recommended to meet with your mortgage broker or financial institution before you start your home search, so you know how much house you can afford.
To learn more about getting pre-approved for a mortgage loan, it’s best to connect with a realtor, like myself, who has established relationships with many trusted mortgage lenders across the GTA. These are professionals that I trust to give my clients the best advice and guidance, so that your home ownership experience is a pleasant one.