The need for shelter is about as primary as a need can get.  It’s right up there with food and companionship.  It’s even higher than the need for WIFI, wine and weekends, henceforth referred to as the Three Ws.

As a full-time Realtor, I regularly have conversations with clients who are trying to reconcile this need for shelter with the cost for shelter.  More specifically, how nice a shelter can they afford to buy?  After all, if affordability was the only issue in real estate, things would be a lot simpler.

  • Does this place back onto a meat rendering plant? Don’t care, how much is it?
  • Is this home literally falling over? Don’t care, how much is it?
  • Will it take me 6 hours (each way) to get to work? Don’t care, how much is it?

Buying a home almost always involves one key trade off. 

On one side is the cost of the home.

On the other is some other attribute.  Size, location, finishes, type, style and so forth.

The cost is almost always in play though.

In the case of all but the most fortunate of buyers, the price is an important factor in the purchase decision.

Specifically, how the price impacts affordability.

After all, many buyers have no intention of paying off the full purchase price.  Owing a million dollars isn’t nearly as scary if you intend to move after 5 years and pay the lender back with the proceeds of the sale.

The cost of the mortgage, or rent if buying a home isn’t in the cards right now, is very important though.

I seem to attract cautious, deliberate clients as the majority of my buyer clients come to me with a number in mind for either their maximum purchase price or their maximum monthly costs.

These same clients are often approved for more by lenders but don’t want to borrow beyond their own, internal limit.  There is a point at which what you can access to borrow is more than what you want to actually have to pay back.

So, how much of your income should be going to your housing costs?

There are two ways to answer that question.

1. The Lender Approach

Lenders (be it banks, credit unions or other people willing to lend you money to buy real estate) look at two key ratios.

Gross Debt Service (GDS) Ratio

The first ratio that lenders consider is your GDS ratio.  A GDS ratio is the percentage of income needed to pay all monthly housing costs, including principal, interest, taxes, and heat.  If the property is a condominium (apartment or townhouse), 50% of condo fees also need to be included.

While there is some variation amongst lenders, there is a general standard of 35% total GDS being the highest most lenders like to see.

Let’s look at how that works out for purchase budgets for various income levels.

In all of the above calculations, I’ve assumed 10% of the maximum budget (based on the 35% of your monthly income going to your GDS) is needed for property taxes and heat.  This is an approximation only.

I’ve also assumed a 20% downpayment so that we can get to an approximate budget amount.

Total Debt Service (TDS) Ratio

The second ratio that lenders look at is your TDS ratio.  A TDS ratio is the percentage of income needed to cover all debts. The calculation is the same as that of the GDS, except all monthly debts are taken into consideration. This includes car payments, credit cards, alimony, and any other loans.

Again, we have some variation on what lenders will accept, but as a genera rule, most lenders look for a TDS ratio of less than 42 per cent.

I have heard stories of buyers being approved for a mortgage amount and in the time between the purchase and the close of the sale of their home, racking up more monthly debt, like a new expensive car lease.  That will definitely impact TDS ratios and if a buyer was close to that 42% number, it can even push them over it and result in the mortgage amount being lowered.

Everyone is different in terms of what sort of other debt they carry, so we can’t do a handy chart like we did for the GDS ratio.  Suffice to say, buyers need to look at not only how much their home will cost them, but also how much other debt is already costing them.

That is how lenders approach the question of how much of your income goes to your housing costs.  Let’s look at the other side of the coin now.

  1. Your Approach

While finding a lender to loan you the money for a mortgage for that new home is obviously a necessary part of the home buying process for most buyers, there is another approach to the question of how much of your income goes to housing.

That’s what makes sense for you and your family.

While Canada has been more conservative in its lending policies than the US, there still exists the very real possibility of biting off more than you can chew.

After all, lenders use the GDS and TDS ratios that are based on your current situation and the current cost of mortgages.

In the chart I created for the GDS ratio implications at various income levels, there are a few key factors that can definitely change – in some cases quite quickly.

The most obvious is your income.  Are you expecting that to go up?  Go down?  Stay about the same?  Is your job secure, at least as far as you can tell?  If you needed to find the same job with a different company is that likely to be an issue?

Remember that both GDS and TDS ratios use income as the basis for their calculations.  If that changes, the results absolutely change.  As such, many of my clients build in a bit of a buffer in case their income levels change.

The other variable in the calculation that can change (albeit not as quickly as income) is mortgage rates.  When I calculated the approximate mortgage that is covered by a given monthly amount available at each income level, I use current rates.  They work out to close to $450 per month per $100K of mortgage right now.

When (not if, but when) mortgage rates increase, more money goes to interest and less to principal and the cost per $100K of mortgage goes up.

If a buyer intends to stay in a home past the end of the term of their mortgage (such as 5 years), then they need to consider that interest rates may in fact be higher at that point.  When that happens, the cost per month goes up and affordability may become an issue.

The final factor that needs to be considered is your lifestyle.

Using the 35% GDS ratio, lenders like to see 65% left over in your income after housing costs.  That’s gross income, so taxes take a decent chunk of that before it hits your bank account.  When you look at other expenses you have for activities you either have to pay for (such as daycare) or activities you want to do (such as holidays), how much is left?

Many of my clients take what a lender is willing to loan and then go below it based on what their lifestyle looks like.

Deciding how much of your income goes to housing costs is pretty complex and I hope this helped clarify it.  If you or someone you like are considering buying real estate, it’s important you work with a Realtor who understands that it isn’t just about finding the home, it’s about paying for it and still living your life afterwards.  If you need help moving forward with real estate, I’d love to be responsible for what comes next.





The simple social intercourse created when people rub shoulders in public is one of the most essential kinds of social glue in society.

In any city I’ve lived in, the areas where pedestrians can gather to mingle, shop, drink, eat and socialize are invariably the most vibrant and popular locations.

Whether it is the Taste of the Danforth, the Distillery District or even malls with significant public space included in them, people congregate where a multitude of activities can take place in one space.

Home buyers will never go wrong buying a home that is decent proximity to such a space.  It makes the area and therefore the home, more appealing.