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How to assess your borrowing capacity

#Mortgage broker #Financial questions

Last update : 2022-07-19 15:38:18

Thinking about buying a house soon? Before you start searching for the home of your dreams, you first have to be able to determine the amount of money you can borrow in order to buy a property.

But how is it possible to determine your mortgage affordability? We'll answer this question for you!

GDS and TDS: two ratios which help to calculate your mortgage affordability

From the outset, you should know that two ratios will be used to calculate your mortgage affordability:

  • Gross Debt Service (GDS);
  • Total Debt Service (TDS).

The first compares the amount you pay annually for housing with your annual income. Before granting you a mortgage, banking institutions will want your ratio to be between 32% and 39%. Specifically, this means that between 32% and 39% of your gross annual income should be spent on your existing mortgage or rent if you are currently in an apartment.

Regarding this point, it's worth highlighting that it’s advisable to get as close as possible to 32% if you want to have some leeway in the event of unforeseen circumstances.

How much can you borrow for buying a house?

If you meet this criterion, a second ratio will be calculated: the Total Debt Service (TDS). In order to obtain this, you have to add the calculation made previously (i.e., the GDS) with all of your current expenditures. In order to be sure that you will be able to pay off your mortgage, the two ratios combined should not exceed 44%.

Consequently, a maximum of 44% of your gross annual income should be enough to cover both your housing costs and the rest of your financial obligations. It is worth mentioning that some financial institutions prefer your TDS ratio to be closer to the 40% mark. Finally, it should be noted that the target ratios for granting a mortgage vary from one institution to another.

Estimate your borrowing capacity using an online calculator

If you would like to get an overview of your mortgage affordability, keep in mind that many financial institutions offer a calculator on their website to assess this. In order to use it, you need to have several pieces of information including:

  • Your gross annual income (or gross family income if there is two of you buying);
  • The down payment you are willing to pay;
  • All of your expenses (housing costs, furniture payments, electricity and transportation expenses, etc.).

Calculating your borrowing capacity

While these tools are useful to get a rough idea of your mortgage affordability, keep in mind that they only serve as a guide. In fact, certain aspects of your situation could have an impact on the actual result.

That's why you should hire a mortgage broker if you want a more accurate and detailed analysis. They will be able to inform you about the types of mortgages that you could avail of and the loan type that would best suit you (fixed or variable), as well as providing you with more information about the most appropriate amortization period according to your situation.

Borrowing the maximum: is this a good idea?

Once you know your mortgage affordability, it’ s likely that the first idea to come to mind will be to look for a house with a price close to this amount. The question is, is this really what you should be doing? Instead, you should probably focus your research on finding a property that is priced below your mortgage affordability.

Different costs must be kept in mind when calculating your borrowing capacity

After all, it is worth bearing in mind that buying a house involves many expenses in addition to the cost of the property itself. These can include:

  • Welcome tax;
  • Notary fees (fees and expenses related to the processing of your application);
  • Mortgage insurance (particularly if your down payment is less than 20% of the purchase price);
  • Down payment;
  • Pre-purchase inspection fees;
  • Evaluation costs;
  • GST/QST (applicable for new or substantially renovated houses);
  • Welcome tax (or stamp duty);
  • Municipal tax or school tax adjustment;
  • Moving expenses;
  • Other expenses (home insurance, renovations, condo fees).

Once all of these fees are calculated, it’s difficult to deny that these will have a major impact on your budget. This is why we reiterate the importance of taking this into consideration when determining the price you will actually be able to pay for a property.

Are you looking for a mortgage broker?

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