Can you afford to buy and carry?

by Shawn Lackie

We have been hearing ad-nauseum, recently, about “housing affordability.” Ok folks, I get it. Times are strange for sure. When we bought our first house in Toronto it was for less than a deposit adds up to these days, and that was for the whole house.

We couldn’t afford to move back to Toronto these days. The gap between the haves and have-nots has become very wide indeed. Sure, people will tell you, salaries these days are far ahead of what was being paid out in the 80s. Don't worry, I definitely won’t get into the tired old conversation about what we paid for a loaf of bread, back in the day. Suffice it to say, it was far less than now but, I digress. Back to affordability.

We read continually about people having to save to put a down payment on a home. What used to take a few years, now has stretched to over two decades, if you are buying in Toronto. That’s not good, but, that’s only half the battle. The more important statistic, seemingly left out of the affordability equation, is, the number of people who can afford to carry a mortgage after the initial purchase. That’s where we get bogged down.

There are two key equations lenders use for home buyers.

One is TDS or Total Debt Service. This would be the monthly carrying costs for ALL of your household debts. It includes the Mortgage, taxes, car payments, credit card, etc. Typically, that total should be less than 40 to 44 percent of the total household income.

The other factor is GDS or Gross Debt Service and this covers only household related expenses. The industry standard for this is usually less than 32 to 39 percent. I won’t bore you with the details, about how to figure that out, but it’s pretty easy and you can always check on-line for tips. Suffice it to say, it’s not rocket science, if you have a good handle on your monthly expenses and just where your dollars are being spent.

Now, where it gets tricky, is, the good old mortgage interest rates. The collective buying public has had a pretty good ride, for the last decade, at least where rates are concerned. Banks were at record lows, a few years ago. It was almost as if they were paying YOU to borrow their money; which was great for a while. Then reality returned and with it higher interest rates. Uh-oh. That’s when things got funky.

What started, as a rate of 1.29 percent, was, all of a sudden, over 5 percent. On a mortgage, that was multiples of hundreds of thousands of dollars which added up real fast and not in a good way. Corners needed to be cut and budgets needed to be established. If you weren’t a disciplined financial person, this spelled some hard times. Add to that, home expenses, like unforeseen repairs.

We had a furnace die in our first home, and all of a sudden we were looking at a serious and unexpected expense. This is one good reason for having contingency accounts; they are for just this sort of thing. Remember to always expect the unexpected.

The other wild card has been the crazy property tax increases over the years. It's time for them to ease off the gas. Just don’t count on it any time soon.

Feel free to check out this story and more on my blog site, at https://slackie14.wixsite.com/buy-sell-and-more.