Megann  Willson

Megann Willson


HomeLife/Realty One Ltd., Brokerage

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If a Better Home is Your Goal, Learn to Love Numbers

Are you good with numbers? I often meet prospects who say they aren’t good with numbers or they don’t like math. Sometimes those same prospects tell me they can’t get accepted by a landlord, or they can’t seem to save for a downpayment, or they can’t get a mortgage…but they don’t understand why. This is where getting to get along with numbers, or understanding your ratios, is vitally important.

If owning a home is a goal for you, or even renting a better place in a nicer neighbourhood, getting a handle on debt will go a long way to helping you meet that target. That’s because your ratios (how much debt you have, compared to income) can be a real stumbling block with lenders and landlords. Think of them as code for how well you should be able to keep up with your payments.

Let’s start with a basic principle: never finance a depreciating asset. What does that mean? It means don’t buy something on credit that will decline in value over time. Realistically, that means the only things you should be financing are real estate/real property, or education (which never goes to waste). Anything else should be paid for outright. Does that mean you shouldn’t collect those loyalty points and special offers that credit cards are dangling in front of you? Not at all…if…and it’s an important if…you can afford to pay the “loan” off by the statement date. If not, then you’ll be paying interest, or, in other words, paying more for the item than the price tag you bargained for.

If you have debt already, start clearing it. There are two basic methods: avalanche, where you pay the minimum on each card/loan, and then put any extra you can afford to pay, on the one with the highest interest rate. The other method, snowball (perhaps apropos for this weekend), has you paying off your smallest debt first (with only minimum payments on the rest, no matter what interest rate they all have). That way you see that the number of cards/loans goes down and helps keep up your enthusiasm for your plan. Both work, albeit differently. If you are REALLY over your head, talk to a credit counsellor, but keep in mind if you decide to declare bankruptcy, it may be difficult if not impossible to get a loan or even a new apartment for several years, because it will show up on your credit report.

Now, on to the ratios. The first is your debt-to-income ratio. Simply put, it’s what it sounds like: how much debt do you owe (mortgage, loans, rent, credit card or student loan minimum payments, child support) compared to how much money do you bring in. If that percentage is too high, it’s a problem. To calculate it yourself (you really don’t need the bank to do it for you; you can use a calculator, I know you can), take that total monthly debt number and divide it by your gross (pre-tax) income, and multiply by 100%. You want the number to be under 40.

Under 34% is good

35-40 % is okay

45%+ is no good

Some lenders will also look at your credit utilization ratio. That’s the balances on the loans and cards, versus the available credit. You should keep it under 30%. (Remember the old adage about how it’s easier to get money if you have money? It applies here, as well).

When it comes to determining whether you can pay the rent, or you are eligible for a mortgage, landlords and lenders will look at your TDS (should be 40% or less). That’s your Total Debt Service.

Calculate it by adding your Principal, Interest, Taxes, and Heating Cost + ½ of your Condo Fees (if any) + other Debts and dividing by your Gross Monthly Income.

For GDS, or Gross Debt Service, they want to see a number under 32%. That’s your Monthly Housing Costs (Principal, Interest, Taxes, Heat, ½ the Condo Fee) divided by your Gross Monthly Income.

Landlords may use a simplified math; your Annual Income divided by 30 (maximum rent) or 40 (minimum rent).

If you get a handle on debt, start a savings and emergency plan, and use a calculator, you can go a long way to reaching your goal. And if it still seems overwhelming and confusing, find a good financial advisor (I can make a few recommendations, if you’d like). Once you know where you stand, let’s talk. If I can’t help you now, I’d like to point you to resources that will make it possible for me to help you later.

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