5 Things to Consider in Home Affordability

piggy bank in foreground, home in backgroundWondering if you can afford to buy a home? There are several things to consider when deciding whether or not a home is truly affordable. Here are some simple calculations you can make that will help you know what price range you should be looking in. Knowing these numbers ahead of time will let you know what adjustments might be necessary in order to qualify for a mortgage.

1. Gross Debt Service Ratio
A GDS ratio is based on the statistics of financial institutions and offers a guideline for shelter related expenses per month that ideally is 32% of a family’s gross monthly income or less. That includes the mortgage principal payment and interest, land taxes, heating expenses, and if you’re purchasing a condominium, half of the monthly condo fee. If you and your spouse have a combined monthly income of $8000/month, it’s expected that you could afford $2560 to cover these expenses. Amortizing your mortgage over a longer period of time can reduce your monthly mortgage payment and making it more affordable, however according to the Canada Mortgage and Housing Corporation, it’s better to mortgage for less than the maximum to allow for flexibility and ensure your home is affordable in the long term.

2. Total Debt Service Ratio
The TDS ratio calculation measures what your entire monthly bills are. Tracking all of your expenses over a period of a few months can be a real eye opener and can help you identify things that you’re spending money on that you may not have to be. When lenders look at these numbers they’re looking for a number that is less than 40% of your gross monthly income. So for a couple earning $8000/month, there should be less than $3200 due as payments to service debt each month.

3. Fluctuations
Another thing to consider is the fluctuation in interest rates and how it affects long term home affordability. While interest rates have been historically low for some time and have made borrowing very affordable, the situation can be quite different if in a few years time rates go up even a couple of percentage points. One strategy to help minimize this is to make bi-weekly payments instead of monthly, which can greatly reduce the amount of interest you’re paying. It’s also good to discuss whether you can apply lump sums to your mortgage without penalty.

4. Home Efficiency
Other factors that determine home affordability is the energy efficiency. The Energy Canada website offers a checklist of things to consider http://www.energy.ca.gov/HERS/documents/Home_Buyers_Energy_Efficiency_Checklist.pdf that includes windows, appliances, insulation, heating and cooling systems. There are also alternative energy sources that may influence your monthly costs.

5. Lifestyle and Home Affordability
You should also consider lifestyle expenses such as commuting to and from work or family activities when determining how suitable the home is for your family. If you buy a home that’s out of town but most of your activities are in town, you may want to see if the additional vehicle expenses are truly in your budget. If you can foresee the need to renovate to accommodate a growing family, you’ll want to consider those expenses in your affordability calculations. Even if you’re not purchasing an investment property, affordability can also be affected by how well the property will maintain its value over time. If at some time you do decide to sell, knowing that you’ve chosen a home that will remain desirable on the market can add to it’s affordability.

We have a strong team here at Urban Realty Group with a variety of business backgrounds including personal lending, so if you’re considering buying a home in Whitehorse come and talk to us! Our award winning team can get you real results in finding an affordable home.