Introduction
Before you start shopping for a new home, you need to know exactly how much house you can afford. Otherwise, you could end up in a home that's way out of your budget.
What you qualify for may not be what you can actually afford, based on your personal situation. Only you can decide how much you're comfortable paying every month.
How Much Home Can You Actually Afford?
You might be tempted to spend the full amount you're approved for. But your approval doesn't know about everything else in your life.
When you're deciding how much to spend on a home, base your decision on three things:
Your Current Expenses
Even if your mortgage is under 40 percent of your total debt, you may have other expenses the lender didn't factor in.
Take into account your down payment, closing costs, monthly debt payments, and other living costs — groceries, transportation, dining out. All of it.
Your Future Expenses
If your financial situation changes in the future, will you still be able to afford your home?
Your pre-approval is based on your current income and debt levels. Consider whether you'll still be able to pay your monthly mortgage if you lose your job or take on more expenses.
Your Lifestyle
Take a look at your current budget. Are you going to have to make cutbacks or changes to your lifestyle in order to live comfortably with the mortgage amount?
Decide what parts — if any — of your lifestyle you're willing to sacrifice. You may decide giving up certain things is worth getting into a better home. On the other hand, you may feel happier spending less on a home if you can maintain other aspects of your lifestyle.
Figure out your priorities, and go from there.
How Lenders Determine Your Mortgage Amount
When you go to a bank or lender for a mortgage pre-approval, you'll receive a quote for the maximum amount you can borrow.
Banks and lenders use specific calculations — called mortgage ratios — to determine what you can afford based on your overall monthly debts, including housing costs. These ratios are:
Gross Debt Service (GDS) Ratio
Your mortgage expenses (principal, interest, utility costs, condominium maintenance fees, and property tax) should represent no more than 32 percent of your gross annual income.
Total Debt Service (TDS) Ratio
The gross annual income needed for all debt, including housing costs, personal and car loans, and credit cards. Your total debt should not exceed 40 percent of your gross annual income.
The Bottom Line
Don't feel pressured to spend the full mortgage amount you've been approved for. Once you've considered the factors above, you'll have a better idea of how much money you should actually spend on a home.
If you want to talk through your numbers and what makes sense for your situation, reach out to Matt at [sayhello@hellomortgage.ca](mailto:sayhello@hellomortgage.ca).
