Figuring out what you can afford to spend on a home is just as important as finding the right home.
Start with your budget
To determine the answer, you’ll want to look at a number of factors, including your household income, essential expenses, lifestyle and discretionary spending, as well as the debt you already carry.
These are all factors that will influence how much you can spend each month on your mortgage and on the other costs associated with maintaining a home, as well as how much of a mortgage you’ll be eligible for. Your calculations from "How to create a budget" will be a useful starting point.
Once you have these numbers, here are two calculations that can help you determine overall affordability. (You can also use the How much can I afford? calculator)
Gross debt service (GDS) ratio
The GDS ratio looks at your proposed housing costs (mortgage payments, taxes, heating costs and 50% of condominium fees, if applicable).
Generally, this amount should be no more than 32% of your gross (pre-tax) monthly income, to be considered affordable.
Example:With a gross monthly household income of $6,000 (annual salary of $72,000), you should spend $1,920 or less on monthly housing costs.
Total debt service (TDS) ratio
The TDS ratio measures your total debt obligations (including housing costs, loans, car payments and credit card bills).
Typically, your total debt payments should be no more than 40% of your gross monthly income.
Example:With a gross monthly household income of $6,000 (annual salary of $72,000), you should spend $2,400 or less on housing costs plus debt repayments.
Using the formulas
Keep in mind that the GDS and TDS are the suggested maximums and are intended as guidelines only. Planning for lower ratios will help you achieve a more affordable lifestyle.
When you consider home affordability, be sure to factor in the extra closing costs you’ll need to complete the home purchase (including sales taxes, realtor and legal fees, land transfer tax and moving expenses), as well as the additional ongoing costs involved with running a home.
Try the How much can I afford? calculator to see how much you may be able to afford.
Have questions about mortgages and the costs of buying a home? Visit TD Helps and ask our experts.