Why this message to you today?
As the average home price in Canada continues to increase so will the amount that most Canadians need to borrow to purchase a home. The average house price in Canada in April 2020 was approximately $488,000 and the current average house price as of June 2023 is approximately $709,000. As demand continues to increase it is not expected that we will see a significant decline in the cost of purchasing a home anytime soon. This is causing Canadians to have to spend more than they might have originally planned or budgeted for.
What is TDSR (Total Debt Service Ratio) and GDSR (Gross Debt Service Ratio)? Why are these ratios important?
TDSR and GDSR are calculations a mortgage provider uses to stress test your ability to afford a home and the maximum mortgage that you would be eligible for. To calculate your TDSR you would calculate your total debt service load (Principal, interest, property tax, heating, the annual site lease in the case of leasehold tenure, 50% of applicable condominium fees, and any payments on all other debt (car loans, lines of credit, personal loans, credit cards). This shouldn’t be more than 40% of your gross household income. Calculating your GDSR is very similar to calculating TDSR except you would only include principal, interest, property tax, heating, the annual site lease in the case of leasehold tenure, and 50% of applicable condominium fees. This should not exceed 32% of your gross household income.
Should these ratios be important to you?
Although these ratios are used to determine the maximum mortgage that you may qualify for, they do not provide you with a clear picture of how much you can afford as they do not take into consideration any additional lifestyle or living expenses and are based on your gross income, not your take-home income. It is always important to test how much home you can afford against your current budget and the additional costs of home ownership. It is often in the early home ownership years that we see the most financial risk due to unexpected costs and lack of budgeting. Leading to increased debt levels and mortgage refinancing.
So what does this mean when purchasing a home today?
These changes mean that you need to ideally be more proactive in understanding your current credit rating and your needs when purchasing a home. To qualify for the 20% down payment it may mean that you need to purchase a smaller home. This is actually a very good thing to do as it will also help you to pay down the mortgage more quickly and build more equity into your home. It will be this larger amount of equity that will enable you to upgrade your home 7 to 10 years down the road into something larger that may be more applicable to your needs at that time.
The bottom line:
Purchasing a home can be a very exciting time. To avoid any future financial difficulties, keep in mind that the maximum mortgage that you qualify for may not be the one you can afford. Would you still be able to set aside some savings each month? How would you cover any unexpected expenses? Could you still afford to maintain a similar lifestyle, or would you have to make some significant changes?
Great sources of information:
- CMHC: https://www.cmhc-schl.gc.ca/consumers/home-buying/buying-guides/home-buying
- Financial Consumer Agency: https://www.canada.ca/en/financial-consumer-agency/services/make-budget.html
Road to Mastery Principle: It is always best to work from a position of strength by being proactive in considering all of your options.
