From Vancouver to Halifax, normally cautious Canadians are spending to the limit when they purchase their first new house or condominium.

"People tend to buy to their maximum," said Jack Molcak, President of the Lethbridge Real Estate Board in Alberta. "They want to get as much bang for their buck as possible."

The hundreds of Alberta mortgage borrowers that Calgary area bank manager Rodney Mendes dealt with over the past year all took the largest mortgage possible.

"From a financial planning perspective, you'd rather pay out other debts and make sure mortgage payments are as small as possible," said Mendes. "Most clients will not look at it that way. Most people are going 100%."

Canadian mortgage lenders from banks and credit unions to insurance companies limit debt-free borrowers to using less than one-third of their gross income to finance a home purchase. The ratio of principal, interest and property taxes to gross income is known as the Gross Debt Service (GDS) Ratio. Each lender uses its own GSD Ratio for specific market conditions and situations. One lender may offer the same borrowers more money simply because it uses a GDS of 30% instead of 28%.

Canadians who carry personal debt such as car loans and credit card balances find their borrowing power reduced. Many families offset this by relying on two or more jobs to raise their gross income. Lenders use a Total Debt Service (TDS) Ratio to calculate the amount of principal, interest and property tax payments borrowers can afford if they already have monthly payments to make. TDS Ratios usually fall between 38% and 42%, depending on the lender.

"With today's buyer, the mentality is not ‘let's make do with what we can conservatively afford," said one Alberta financial adviser. "We are in a rising market and many people think ‘buy as much as you can' and ‘the more you invest, the more your return.' Those that can be conservative and buy a smaller house tend not to. People want the most house they can afford."

Comming Next week: A few exceptions to the "borrow to the hilt" rule.

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Published: November 23, 1999

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