How much house can I afford? GDS, TDS and Canadian mortgage stress test.
Comprehensive Guide to Mortgage Affordability
Buying a home is a significant financial decision and it’s crucial to determine how much mortgage you can afford before diving into the housing market.
In Canada, several factors come into play, including the gross debt service ratio (GDS), total debt service ratio (TDS), and the Canadian mortgage stress test B-20.
In this step-by-step guide, we’ll walk you through the process of calculating your mortgage affordability ensuring that you make an informed decision aligned with your financial situation and goals.
Step 1: Determine Your Gross Income
To begin, you need to calculate your gross income, which refers to the amount you earn before taxes, deductions, or any other expenses have been taken out.
Make sure to accurately assess your income to lay a solid foundation for the subsequent calculations.
Step 2: Calculate Your Gross Debt Service Ratio (GDS)
The GDS represents the percentage of your gross income allocated to housing costs.
These costs include your monthly mortgage payment, property taxes, heating expenses, and 50% of your condo fees if applicable.
According to the Canada Mortgage and Housing Corporation (CMHC), your GDS should not exceed 35% of your gross income.
To calculate your GDS, use the following formula:
GDS = (PIT + heating + property taxes + 50% of condo fees) / gross income
Here, PIT stands for Principal, Interest, and Taxes, which are the three components of your monthly mortgage payment.
Step 3: Calculate Your Total Debt Service Ratio (TDS)
The TDS represents the percentage of your gross income allocated to all debt payments, including your housing costs.
This encompasses your mortgage payment, credit card payments, car loan payments, and any other outstanding debts.
The CMHC suggests that your TDS should not exceed 42% of your gross income.
To calculate your TDS, use the following formula:
TDS = (PIT + heating + property taxes + 50% of condo fees + other debt payments) / gross income
Step 4: Consider the Canadian Mortgage Stress Test B-20
In Canada, mortgage applicants must undergo the mortgage stress test B-20, introduced in 2018.
This stress test ensures borrowers can qualify for their mortgage based on the rate offered by the lender plus 2%.
To determine your mortgage payments based on the stress test, you can consult with Huber Mortgage to dial in precise numbers.
Step 5: Determine the Maximum Mortgage Amount You Can Afford
Once you have calculated your GDS, TDS, and mortgage payments based on the stress test, you can ascertain the maximum mortgage amount you can afford. Follow these steps:
- Subtract your monthly debt payments from your maximum allowable TDS.
- Multiply the result by your gross income.
- Divide the outcome by (1 + stress test rate).
This calculation will provide you with the maximum mortgage amount you can afford, considering your financial situation and the guidelines set by the CMHC.
Conclusions and Further Thoughts
Calculating your mortgage affordability is a vital step towards making an informed decision when purchasing a home in Canada.
By understanding the GDS, TDS, and the Canadian mortgage stress test B-20, you can determine the maximum mortgage amount you can afford, ensuring it aligns with your financial capabilities.
Remember, while these calculations offer a solid foundation, lenders may have additional requirements beyond the CMHC guidelines. Make sure to reach out to Huber Mortgage who can compare lenders, compare rates and consider all the options, making the best choice for your unique circumstances.
Sincerely,
Michael
PS – One of my hobbies is blogging about mortgages, debt and government policy. During the day I’m a MORTGAGE BROKER in Kelowna, BC!
Check out the Huber Mortgage Home Buyers Guide HERE
