Calculate how much you can afford to spend on housing each month without putting your financial health at risk. These two simple rules will show you what you can afford to pay for a home. Understanding these rules can also help you when it’s time to get approved for a mortgage.
Affordability rule 1: As a rule, your monthly housing costs should be no more than 32% of your average gross (before-tax) monthly income. This percentage is known as your gross debt-to-income or gross debt service (GDS) ratio. CMHC restricts homebuyers to a 35% GDS ratio to qualify for an insured mortgage. Housing costs include: · Your monthly mortgage payment (principal and interest)
· Property taxes
· Heating expenses
· 50% of condo fees (if applicable)
· 50% of homeowner’s association fees (if applicable)
· 100% of the site rent for leasehold tenure (if applicable)
Affordability rule 2: As a rule, your monthly total debt load should be no more than 40% of your average gross (before-tax) monthly income. This percentage is known as your total debt-to-income or total debt service (TDS) ratio. CMHC restricts homebuyers to a 42% TDS ratio to qualify for an insured mortgage. Your monthly debt load includes:
· Housing costs (amount calculated in rule 1)
· Car loans or leases
· Credit card payments
· Line of credit payments
· Other mortgage payments.
The maximum amount you can afford to spend on a home depends on these numbers and the size of your down payment. For first-time buyers, saving a down payment can be the hardest part of buying a home. There are programs out there to help such as the RRSP Home Buyers Plan or the First Time Buyers Incentive