Crunching the numbers

How much home can you afford?

Shopping for the home of your dreams requires knowing how much you can afford to spend, which for most buyers ties directly into a mortgage.

Financial institutions in Canada look at a buyer's Gross Debt Service (GDS) and Total Debt Service (TDS) ratios to help determine how much mortgage to approve, and therefore, how much home a person can afford.

GDS includes expenses related to the home, such as mortgage principal and interest, property taxes, heating costs and condo maintenance fees, if applicable. These should account for no more than 30 to 32 per cent of your gross annual income.

TDS adds other debt obligations, such as monthly car payments, personal loans and credit cards, and should not exceed 37 to 40 per cent of your gross annual income.

"How much the bank allows you to finance is not necessarily the same number as how much you can afford." - Tom Feigs, Certified Financial Planner and money coach

Both these figures are part of the conversation that a mortgage professional will have when sitting down with a client, says Joshua Johner, regional vice-president and mortgage specialist with RBC.

"There are other things you need to consider that don't come into that formula," said Johner.

"Anybody can punch something into the computer and say, 'here's your ratios, here's what you're qualified for or not qualified for.' It's really about taking that next step and looking at different scenarios. What does it look like two or three years from now? Or five years from now?"

As an example, Johner points to a young couple that's looking to buy a home, but also plans to start a family in the near future. "What does that one year or 18 months now look like, with one of the individuals taking parental leave?" he said. "And how would that affect your debt servicing going forward?"

Tom Feigs, a Certified Financial Planner and money coach, suggests that people do a complete spending plan on the cost of homeownership, plus personal payments and lifestyle expenses.

"How much the bank allows you to finance is not necessarily the same number as how much you can afford," said Feigs. "Do you have pets? How much do you spend on vacations?"

He says if the numbers don't match up to your income, consider if you would be willing to spend less on travel or other lifestyle expenses to afford your dream home. However, be realistic about those tradeoffs.

"The dollars that will be going in and out of your chequing account are real dollars," he said. "If you fudge the numbers in the hope that it will just work, you are heading down the path to perhaps more consumer debt, and then making it harder and harder to make the mortgage commitment."