Financially Speaking

Buying your first home is a thrill, a lifestyle commitment and probably creating the largest debt you will ever take on. But when is large too large? How much house can you really afford?

That’s a tricky question with no easy answers. Your lender determines your eligibility for a loan through two simple calculations:

• the Gross Debt Service Ratio (GDSR) that considers your monthly income versus your proposed new housing costs (including mortgage payments, property taxes, and/or 50% of condominium fees, if applicable);
• the Total Debt Service Ratio (TDSR) that measures your gross monthly income versus your total debt obligations (such as loans, car payments and credit card bills).

These are useful ‘loan eligibility’ indicators — but they don’t give you an accurate assessment of the mortgage amount you can realistically afford. Here are some tips to help make sure your dream home is a financially comfortable fit.

Look to the long-term You’re going to be in your home for many years and your financial obligations will change over time. Assess your current annual household income and then consider the financial impact of changes like having children or one day moving from a dual-income to single-income situation.

Look at all the costs When you’re caught up in the home buying process, it’s easy to overlook costs like closing costs, homeowner’s insurance, home maintenance costs and even the new furniture you’ll need to buy. At the time of purchase, the assessed value of the home is typically increased to match the purchase price. If the previous assessed value was low, the new assessment can materially increase the amount of property tax you’ll have to pay versus what was paid by the previous owner.

Look at your purchase realistically Once you’ve got an accurate fix on the real cost of your dream home, consider the financial trade-offs you’re willing to make. Maybe a smaller house would give you more lifestyle and spending flexibility? Or are you willing to put your family on a tighter budget in order to afford a bigger home?

Look to your plan Work with your professional advisor and a mortgage planning specialist to incorporate your housing costs into your overall, long-term financial plan. Determine which mortgage options and payments work best for you. Look at your current spending and lifestyle, how your earning power will change over time, and how much you’ll need to save for retirement.

That way, you’ll feel perfectly comfortable in your new home, safe in the knowledge it’s a home you can really afford – now and in the future.