Financially, buying a home comes down to two key things: how much you can afford
as a monthly mortgage payment and how much you can afford as a down payment.
To determine affordability, financial institutions use two simple calculations: the Gross Debt
Service ratio (GDS) and the Total Debt Service ratio (TDS). The GDS looks at your gross monthly
income vs. your proposed new housing costs (mortgage payments, taxes, heating costs, and 50% of
condominium fees, if applicable). Generally speaking, this amount should be no more than 32%. For
example, if your gross monthly income is $4,000, you should not be spending more than $1,280 in
monthly housing expenses. The TDS ratio measures your gross monthly income vs. your total debt
obligations (including loans, car payments, and credit card bills). Generally speaking, your TDS
ratio should be no more than 37%.
Keep in mind that these numbers are prescribed maximums and that you should strive for lower ratios
for a more affordable lifestyle.
Before falling in love with a potential new home, you may want to obtain a pre-approved mortgage. This
will help you stay within your price range, thus spending more time looking at homes you can reasonably
afford. The pre-approval meeting is the time to find out about different mortgage products and
services that are available to suit your particular needs. First-time buyers may want to ask about
special programs such as the CMHC 5% down payment option and the Federal Governments' "RSP Home Buyers Plan".
A pre-approval meeting can also be treated as a fact-finding mission to go over closing costs. For
example: land transfer tax, legal fees and other disbursements. A good rule of thumb is to budget
about 2% of the purchase price for closing costs. People who buy new homes from builders, pay 6% GST
which is often included in the purchase price.
Once the mortgage is pre-approved, the interest rate is frozen for 60 days (90 days on
new home construction). If interest rates drop, home buyers get the lower rate but
if they rise, the home buyer still receives the frozen rate. There is no obligation to
actually obtain a mortgage through the bank that prequalifies the home shopper. Pre-approval
is a service offered by the bank at no cost.
Information for this article was taken from Mortgage Wise Booklet, Canadian Banker's Association.
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