Can you afford to buy?

According to generally accepted methods, the most you should pay for housing costs (principal, interest, taxes and heating) should not exceed 30 to 32 percent of your household's gross income¹. For example, if your gross annual income is $60,000, you could spend $19,200 per year (or $1,600 per month) in housing costs.

¹ Gross household income is considered to be the total income before taxes and other deductions. "Net" income is income after taxes and other deductions.

However, you also have to take into account your other financial commitments. The total repayment costs for all your debts (housing costs and other loans) should not exceed 40 to 42 percent of your gross income, or $2,100 per month (based on $60,000 annual income).

An example

Mary and John have a combined gross annual income of $60,000. Can they afford a mortgage loan of $75,000? Here are the details:

Monthly financial expenses

Expenses	Amount	(% of gross income)
Principal + interest2	$564
Taxes	$200
Heating	$100
Housing costs	$864	17%
Automobiles	$600
Credit cards (5% of $2,000 limit)	$100
Marge de crédit (10 % de limite de 2 000 $)	200 $
Other costs	$900	18%
Total	$1,764	35%

2. Over 20 years, 5-year term at 6.7% interest. As you see, with a debt ratio of 35%, Mary and John are within the 42% or $2,100 maximum per month.

How do you calculate your borrowing capacity?

Using Mary and John as an example (net annual income of $45,600), let's go through the two steps to calculate your borrowing capacity.

Calculate your monthly budget surplus or deficit

a)	net monthly income	$3,800
b)	less household expenses	$3,325
Surplus (a - b)		$475

Calculate your maximum mortgage payment

a)	Surplus (from above)	$475
	Plus present housing costs	$525
b)	Amount available for housing	$1,000
	Less taxes (school and municipal)	($200)
	Less heating and electricity	($100)
Maximum allowable mortgage payment		$700