According to Canadian Mortgage and Housing Corporation (CMNC), the maximum gross debt service (gds) ratio to purchase a home with a 5% downpayment is 35% of gross income. What we want to illustrate is the consequences to a homeowner whose mortgage rate will increase 2% at the end of the first term.
Let’s assume the homeowner has a gross income of $5500/mth and has purchased a home and the mortgage financed is $300,000 @ 3.59% for a 5 year term, with a 25 year amortization.
- Heating costs are $113/mth
- taxes $300/mth
- Mortgage payment – $1,512 monthly
- GDS ratio – 35% ($1,925/$5,500)
If you use the homeowner’s net income of $4012, the actual percentage is closer to 48% of income to carry these costs.
Using a scenario of a 2% increase in mortgage rates at renewal, the homeowner will be financing the balance of $259,264 @5.59% for the remaining 20 years amortization. Using the same rate of pay and heating and tax costs:
- Mortgage Payment – $1,787
- GDS ratio – 40% ($2,200/$5,500)
Using the homeowner’s net income of $4,012, the actual percentage is closer to 55% of income to carry these costs.
This translates into an increased payment of $280 per month, which may affect the homeowner’s ability to pay for other household debt, such as a vehicle payment, credit card payment, or consolidation loan. This may result in late or missed payments and eventually lead to other creditor collection activities.
This scenario is based on a small increase in mortgage rates. There are many other factors which may also contribute to impacting the homeowner’s cash flow. Health, job loss or marital breakdown.
If your household is running out of money before the end of the month, there are options available to you to reduce your debt and stress levels.
**All figures are used for illustrative purposes only.