Home's Guide
methods for estimating purchase price

LOCKING AT PRICE
Before you begin to look for your home, you should take a realistic look at what you can afford. Finding the money for a down payment is one thing; carrying the mortgage is another. It's important to look at both before making a decision about what and when to buy.

ESTIMATING PURCHASE PRICE

• Gross annual income
• The three per cent rule
• The GDS ratio
• The TDS ratio
• The budget breakdown

GROSS ANNUAL INCOME
There are several ways to estimate a realistic purchase price for you. Many lenders recommend using the gross annual income multiplier because it is the simplest method. To establish the purchase price you can afford, multiply your gross (before tax) annual income by 2.5. Include assured income only, such as your wage, salary or secure investment income. If your spouse, partner or other co-applicant also has an assured income, include that as well.

ESTIMATING CARRYING COSTS
Estimating purchase price is useful, but doesn't tell you everything you need to know about your circumstances. To figure out what you can actually afford, you need to know what it will cost to carry the property. Carrying cost is defined as the actual cost to carry the property. Carrying cost is defined as the actual cost of living in, financing and maintaining the property.

THE THREE PER CENT RULE
The simplest way to estimate carrying costs other than financing i sthe three per cent rule. This is especially useful for people who haven't owned a home before and so are likely to have a harder time estimating how much to set aside. To calculate how much you will need each month to live in and keep your home in good repair, multiply the value (purchase price) of the home by three per cent and then divide by 12.

THE GDS RATIO
Many lenders use the Gross Debt Service (GDS) Ratio method as a simple and reliable estimating tool. It's based on what you can afford to pay each month. This monthly payment is sometimes refered to as PITH (Principal, Interest, Taxes and Heating) because it is assumed to cover those costs. It is also expected to cover secondary home financing and 50% of condominium fees, if applicable. Most lenders recommended that you use no more than 32% of gross monthly income to service your mortgage.

Once you have estimated the monthly payment for your GDS, you can make a rough estimate of the maximum mortgage you can afford. For example, if your maximum monthly payment is $1,600 and your monthly payment per $1,000 is $7.95:25-year amortization period, 8.5% rate, divide the $1,600 by $7.95. This is equal $201.26. Multiply by 1,000 and you get $201,260 the mrtgage amount you could probably afford.

THE TDS RATIO
Lenders also estimate carrying cost with the Total Debt Service (TDS) Ratio. The TDS ratio is defined as the percentage of gross annual income needed to cover payments for housing and all other financing obligations. Most lenders recommend that you use no more than 40% of your gross annual income to service your mortgage and cover other debts and obligations.

THE BUDGET BREAKDOWN
A good, but more demanding, way of estimating carrying costs is to take a close look at your current and projects budgets.
-what is your actual take-home pay
-are you putting aside savings
-do you have other major credits
-what o you spend on food, clothing, transportation, entertainment
-do you have other major obligations

Once you've worked though those figures, you should have a very good idea of the actual costs you are facing, how you expect to meet them and what ize of monthly mortgage payment is realistic.