How to calculate your Mortgage Payment - Can you afford it! (Part 2)

In Part (1) I outlined how to calculate the effective interest rate that is charged on semi-annual compounded mortgages. Today I am going to show you how you can determine if you can afford your mortgage payment and how much your monthly payment will be.

In order to determine whether or not you can afford a mortgage, you must calculate your Gross Debt Service Ratio (GDS) and your Total Debt Service Ratio (TDS). The GDS is calculated as a percentage of annual income required to cover housing cost; the formula for this calculation is (Principal + Interest + Property Taxes + Heating + ½ Condo Fee)/Total Income. The TDS is calculated as percentage of annual income to cover housing costs + any other current debts. Typically when determining if you can afford your mortgage the GDS and TDS cannot exceed 32% and 40%, respectively.

Calculating GDS and TDS

GDS = (P+I+T+H)/Total Income

TDS = ((P+I+T+H) + All other Debt)/Total Income

Principal = P

Interest = I

Property Taxes = T

Heating Costs = H

How much can you afford based on the TDS

(Numbers are per month)

Income = $8,000

Heat = $75

Taxes = $200