The real estate market is among the busiest and most central markets to daily life across nearly every culture and country. This is even more so the case when it comes to residential real estate, as everybody, regardless of field or status, needs a place to live.
Therefore, it is imperative to be fluent enough in the workings of the real estate market in order to improve your chances of not only navigating this busy market, but of laying down the foundation for eventual financial stability and success.
One of the most important concepts to be aware of when it comes to navigating Canada’s residential real estate market is that of real estate affordability, and how to calculate the way this value impacts your search for a home.
Industry professionals such as Simon Kronenfeld, founder of AJGL group, spend a large part of their time keeping track of shifts in the market and making sure they are up to date on the most important aspects of residential real estate and all of its components.
What is Real Estate Affordability?
Before putting in the work to calculate your real estate affordability, it is first important to understand what real estate affordability is.
In the simplest terms, your real estate affordability is the amount of money you can reasonably spend on a mortgage relative to your current income, debt, and expenses – including both monthly expenses, such as car payments or credit, and your more general home expenses, such as taxes and utility fees.
Higher affordability means you’re able to spend more money on your mortgage, while lower affordability means it may be necessary to search for real estate in areas with lower prices, or for less expensive homes.
Experts such as Simon Kronenfeld, who have devoted their time to understanding their financial responsibilities at every level, are able to determine their mortgage affordability with ease.
How to Calculate Real Estate Affordability
In order to calculate your real estate affordability, there are several variables that are imperative to find: your yearly income (as well as the incomes of any other residents of your home), your monthly debt payment, and your monthly living expenses (including costs such as property taxes and utility fees).
With this information, there are two major values that are used to calculate your real estate affordability: your Gross Debt Service ratio, and your Total Debt Service ratio.
Gross Debt Service ratios are found by weighing your gross housing cost per month vs your monthly gross housing income, while Total Debt Service ratios are found by adding expenses into the mix, making the calculation your gross housing cost per month PLUS monthly expenses, vs your gross monthly housing income.
How to Better Your Chances
While real estate affordability is a value that is often fixed based on your income and expenses, there are a number of steps you can take in order to better your chances of potentially raising your affordability value.
Firstly, eliminating any debt is a great way to increase your affordability, as this frees up a lot more of your income that can go towards your mortgage calculations. In addition, figuring out ways to increase your household income is another straightforward solution to open up more possibilities for your affordability.
Another strong way to increase your chances of raising your real estate affordability value is to find a lower mortgage rate which will allow you to make lower monthly payments, saving you your income to go towards other expenses.
Putting down a larger initial down payment on your mortgage is another great way to save a large part of your valuable income for future payments and expenses.
