affordability guidelines

Affordability is the biggest issue that is in perpetual discussion regarding the Metro Vancouver and Fraser Valley housing markets. There is no doubt that housing is relatively expensive in this region, for a number of reasons. Limited land, thin inventory of homes for sale and steady demand due to population growth seem to keep affordability measures stretched.

It is really important for a prospective homebuyer to ensure that they are only purchasing a house, condo or townhome that they can truly afford. Affordability metrics like debt ratios, are really valuable guidelines to follow. This is to ensure that you can remain in your home for the long-term in a financially viable way. As well, following affordability guidelines helps to keep your financial life somewhat balanced between housing costs and other financial goals in life.

IMPORTANT DEBT RATIO METRICS

Below are two standard affordability ratios that a homebuyer should be aware of and understand. These measures will be used by your lender to determine the mortgage amount and payment that you qualify for. Ultimately, this helps to determine the maximum price you should pay for a Metro Vancouver or Fraser Valley home.

The Gross Debt Service (GDS) ratio is a financial metric used by lenders in Canada to evaluate a borrower's ability to pay back a mortgage loan. It measures the percentage of a borrower's gross income that is needed to cover the housing costs associated with the mortgage, including principal, interest, property taxes, and heating expenses.

In Canada, the maximum allowable GDS ratio is typically around 35% of the borrower's gross income. This means that the borrower's housing costs should not exceed 35% of their gross income.

Lenders use the GDS ratio, along with other financial metrics such as the Total Debt Service (TDS) ratio, to determine whether a borrower qualifies for a mortgage loan.

The TDS ratio includes all of the borrower's debt obligations, including credit card payments, car loans, and other loans. The maximum allowable TDS ratio in Canada is typically around 42%.

Overall, the GDS and TDS ratio is an important factor that lenders consider when evaluating a borrower's financial capacity to repay a mortgage loan in Canada.

USEFUL CALCULATORS

I highly recommend the debt service calculator available from the Canada Mortgage and Housing Corporation (CMHC). This tool helps prospective homebuyers input their personalized financial information to determine where they score and fit in terms of the GDS and TDS ratios.

SUMMARY

Estimating your debt ratios is helpful to better understand what price range of a house, townhouse or condo you can purchase. It is worth spending a few quick minutes on this exercise to help measure your affordability (i.e. how much of a mortgage you can take on) when starting on the homebuying journey.