Eddie Coleman Real Estate

What Can I Afford?

Home ownership is a dream for many, and a great way to build equity, but with it comes long-term responsibility. The reality is you have to live with your mortgage, so be sure not to sacrifice lifestyle for a house. The best way to avoid paying more than you can afford is to be prepared.

Below are some general rules of thumb to help you navigate the numbers to determine what you could afford in a home. Keep in mind that lending decisions will also be based on your credit history, employment stability, down payment, and interest rates.

First Affordability Rule

Lending institutions allow you to spend approximately 32% of your gross annual income on housing costs (including property taxes and heating, plus 50% of condominium fees, if applicable). The ratio of debt to income is referred to as the Gross Debt Service ratio or GDS.

The following calculation will show you how much you could afford monthly for housing:

Your gross monthly income _____________________________
Spouse’s gross monthly income _____________________________
Other monthly income _____________________________
Total monthly income _____________________________
Monthly income x 32% = GDS _____________________________

Second Affordability Rule

You may have other monthly financial obligations, such as car and credit card payments. These payments, plus your housing costs, are called the Total Debt Service ratio or TDS. This figure should not exceed 40% of your gross household monthly income.

The following calculation will show you what you can afford* for monthly housing costs (a mortgage payment), including any outstanding debt:

A) Monthly Income from your GDS Calculation Above x 40% = TDS _____________________________
B) Add up your monthly payments for loans, credit cards and other debts _____________________________
Monthly income left for housing costs
(subtract amount B from amount A): _____________________________

*Please note – this is an estimate only. Be sure to speak to a mortgage specialist for an accurate assessment. We would be happy to provide a referral.

Math not your thing? Just use these handy Mortgage Calculators:

Scotiabank – What Can I Afford? Calculator
CMHC — Mortgage Affordability Calculator