Know what you can afford – get a mortgage pre-approval.
When it comes to securing a mortgage, people want to understand how much they can borrow. Here are a few quick formulas to help you figure out exactly what you can afford.
Loan to Value (LTV)
A lender will only let you borrow a certain amount of the property value. This is referred to as the Loan to Value or LTV. LTV (%) = (the amount of mortgage loan) / (the value of the property)
You can borrow up to 80% of your property value (80% LTV) without worrying about low mortgage rate default insurance fees, or up to 95% with default insurance fees. Whether or not you are required to pay CMHC mortgage rate loan insurance is dependent on your LTV.
Total Debt Service (TDS) Number
Your TDS number is the percentage of your gross annual income required to cover payments associated with your new home, plus costs associated with your other debts.
TDS = (Home expenses + Car Loans + Credit Card Debts + Other Loans) / Gross Income
Your total debt service number (TDS) should not exceed 40%. This provides you with a cushion in case of a financial emergency.
Gross Debt Service (GDS) Number
Your GDS number is the percentage of gross annual income required to cover payments associated with housing, including best mortgage rate payments, interest, property taxes, and heating.
GDS =(Annual Mortgage Payments + Property Taxes + Interest + Condo Fees + Heating) / Gross Annual Income
Your gross debt service number (GDS) should not exceed 32%.
Calculations not your strong suit? Contact a mortgage broker for personalized help.