Affordability is the pillar of responsible homeownership. Buying within your financial means will ensure you can meet your financial obligations with confidence each month. Let’s explore affordability in more detail.
DEBT SERVICE RATIOS
Mortgage lenders and mortgage insurers determine affordability by using debt service ratios, which compare debt and homeownership costs relative to income. This gives them a reliable estimate of how much of a mortgage is appropriate for your circumstances.
To qualify for an insured mortgage with a down payment of less than 20 per cent of the home price, prospective homebuyers have to meet two different types of debt service criteria:
No. 1: Gross debt service (GDS) ratio of 39 per cent or less
GDS is calculated by comparing homeownership costs (mortgage payments, property tax, heating and, where applicable, 50 per cent of condo fees) relative to household income.
No. 2: Total debt service (TDS) ratio of 44 per cent or less
TDS is calculated by combining the homeownership costs outlined above with debt payments (credit, car or student loans, etc.), and then comparing that total relative to household income.
If your debt service ratios are too high, you can lower them by increasing your verifiable income (try a second job), paying down debts, or lowering your anticipated mortgage payments with a larger down payment or a less expensive home.
DOLLARS & SENSE
In some real estate markets, affordability can be a difficult concept to put into practice. Homes in your community may cost well above what might be affordable for you, and you may know people who have spent beyond their means to buy their first home, making it seem like that behaviour is the norm.
Resist the urge to jump in if the waters are over your head. Keep in mind that debt service ratios don’t even touch on the significant expenditures Canadian households pay each month – like groceries, transportation, child care, cellphones and internet service – let alone those little luxuries like birthday presents, entertainment and children’s extracurricular activities.
If your personal circumstances make immediate homeownership in your desired community feel like too much of a stretch, consider alternatives that may help. Here are five options.
1. Waiting. Keep paying down your debt, and work on growing your down payment nest egg.
2. Moving. Start your house hunt in a community where homes are priced lower.
3. Off-setting your home expenses. Rent out your parking pad or add an income unit to your basement. TIP: Always check local zoning regulations before you buy.
4. Downsizing. See if small-space living will get you into a more affordable home.
5. Adjusting expectations. Condo fees can vary significantly by building. Why pay for bells and whistles like premium recreational facilities if your office already covers your gym membership?
Remember: The road to homeownership is a marathon rather than a sprint. Take your time and pace yourself. The security and peace of mind you’ll have when buying within your means is priceless.
Genworth Canada Publication: A Better Way to Homeownership Digest Spring/Summer 2019