Financially Speaking

Buying a home is usually the largest financial decision any Canadian family will ever make – one that affects your family, future and lifestyle. It gives rise to a lot of questions – like deciding on the neighbourhood you’ll live in, the school your kids will attend, possible lifestyle changes, and whether or not you’ll be able to profit from a possible future sale.

But the key question is always: How much home can you comfortably afford? And that is a tricky question for any home buyer because there is no easy answer. Standard mortgage loan guidelines used by lenders to determine your eligibility for a loan include Total Debt Service ratio (TDS) and Gross Debt Service ratio (GDS). The ratios allow the lender to calculate your mortgage in relation to your overall income and financial obligations – but they don’t tell you the mortgage amount you can realistically afford. So here are three tips for determining how much house you can actually afford.

1. Assess your mortgage in relation to your short and long-term financial goals. Work with a financial advisor and mortgage specialist to assess your income and financial commitments and establish a reasonable budget that allows you to manage all of your expenses. Look at how your earning power may change over time, how much you’ll need to save for retirement, and the type of lifestyle you’ll want to enjoy.
2. With your financial commitments and goals mapped out, consider any trade-offs you’re willing to make. A smaller house may offer more flexibility in terms of your lifestyle and spending. Or perhaps putting your family on a tighter budget may allow you to afford a bigger home.
3. Review your mortgage, at least annually. Your financial picture may change over time, and most mortgages today come with a number of options that offer greater flexibility and the ability to save a great deal of money. These include increasing your payments, making annual lump sum payments, changing your payment frequency or even ‘blending or extending’ your mortgage to take advantage of low long term rates.

Your home should always be where your heart is – but too much home at too high a price can not only strain your heart but every other aspect of your family life. Your professional advisor can help you determine how much house you can afford based on your overall financial picture, including your individual goals and resources.