5 Things to Know About Mortgage Affordability
Are you looking to buy a new home? Do you wish to take a mortgage loan? Well, you must know the concept of mortgage affordability. It differs from housing affordability and has a different calculation. Let us know everything about it through this informative and concise blog.
1. What is Mortgage Affordability?
If there are luxurious villas, there are condominiums as well. The Canadian housing market comprises different buyers.
No matter what property you buy, can you afford it? –You must think via the mortgage route, everything is easy, and you can buy the best after paying up to 20% of the purchase price on a down payment.
But this never holds. What follows is the series of monthly mortgage payments for a period, which sometimes is even 30 years!
It led to the concept of mortgage affordability, which represents the maximum amount that you can afford to borrow based on varied factors, such as
- What is your gross monthly income?
- What are the debts assumed by you other than the mortgage loan?
- What is your lifestyle, and how much are your living costs?
- What are your future expenses?
You might borrow as much as $1 million, but you prove you can afford it. You can find that out from the – “Mortgage Affordability Calculators.”
The mortgage affordability and the amount that you can borrow maintain a direct relationship with each other. The higher your mortgage affordability, the higher will be your borrowing capacity.
2. How does Mortgage Affordability Work?
As mentioned earlier, mortgage affordability depends on several factors. It includes:
- Your income (income of the applicant)
- The income of your co-applicant (if any)
- Your total other debt payments, such as
- Personal Loans, Car loans, student loans, etc.
- Credit Card Balances
- Line of Credits, etc.
- Living costs like heating expenses, condominium fees, etc.
Mortgage affordability depends on two different ratios which are:
a) Gross Debt Service Ratio (GDS)
You can calculate your GDS using the following formula:
Gross Debt Service (GDS) Ratio=Total Housing CostsGross Family Income x 100Gross Debt Service (GDS) Ratio=Total Housing CostsGross Family Income x 100
Here,
- Total housing costs are the aggregate of:
- The monthly mortgage payments (includes both mortgage principal and interest)
- Property taxes
- Heating expenses
- Condominium fees
Let us understand GDS with a practical example.
Your monthly household income (before taxes) is $9,000. And your monthly mortgage payments are $2,800. In such a case, your GDS ratio will be:
Gross Debt Service (GDS) Ratio=$2,800$9,000 x 100=31.11%
b) Total Debt Service Ratio (TDS)
You can calculate your TDS using the following formula:
Total Debt Service (TDS) Ratio=Total Housing Costs+Cost of Other Debt PaymentsGross Family Income x 100Total Debt Service (TDS) Ratio=Total Housing Costs+Cost of Other Debt PaymentsGross Family Income x 100
The TDS is a more realistic measure considering a mortgage and other debts, such as personal loans, credit card balances, car loans, etc.
Let us understand TDS using a practical example.
Your monthly household income (before taxes) is $10,000. And your monthly mortgage payments are $3,500. Besides this, you are also paying $800 in credit card loans and $1,500 for the personal loan every month.
In such a case, your TDS ratio will be:
3. The Recommendations of CMHC
Being unrealistic is the biggest mistake most homebuyers make. The CMHC (Canada Mortgage and Housing Corporation) has suggested an ideal percentage for both GDS and TDS. These are:
| Mortgage Affordability Ratio | Ideal Percentage |
| GDS (Gross Debt Service) Ratio | Must be less than 39% |
| TDS (Total Debt Service) Ratio | Must be less than 44% |
4. How to Boost Mortgage Affordability?
If you wish to borrow a higher amount, then you must have healthy mortgage affordability. Below are the three simple steps following which you can boost your mortgage affordability:
- Try to increase your gross family or household income – it will reduce your GDS ratio and increase your mortgage affordability.
- Try paying off your other debts. Start by eliminating the debts with the highest interest rates, such as credit card balances, personal loans, etc. – It will reduce your TDS ratio.
- Mortgage affordability considers the income of co-applicants. Hence, you can have any earning family member as your co-applicant. However, remember that in the event of your default, your co-applicant shall be liable for your mortgage debt.
5. What does Mortgage Affordability tell You?
Mortgage affordability tells you how much you can borrow. It considers your debt obligations, household income, and living costs.
Most lenders calculate the GDS and TDS ratio to check for mortgage affordability. The CMHC (Canada Mortgage and Housing Corporation) has recommended that GDS and TDS ratios must not exceed 39% and 44%.
Try to adhere to the limit set by CMHC instead of bypassing it and boost your mortgage affordability by increasing your household income, paying off other debts, and signing a co-applicant.
Higher mortgage affordability will allow you to borrow more at competitive mortgage rates
