5. Desired price and terms of purchase
In addition to the immovable’s essential and additional features, the broker must take into account the financial aspects and the time frame which the buyer has to make the purchase or occupy the immovable.
The desired purchase price is established before signing the brokerage contract. The broker must set this price based on the buyer’s capacity to pay, by obtaining information on the buyer’s employment, income and budget, the funds available for his down payment, and his financial capacity to assume the various expenses required to own a property.
Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS)1
The Gross Debt Service Ratio (GDS) is calculated by adding up all of the buyer’s gross monthly income (employment income before taxes, investment income and others), including that of the buyer’s spouse, and multiplying the total by 32%. This gives the maximum amount the household can spend on housing. The expenses considered in the calculation of the GDS consist in the monthly mortgage payment, including principal and interest, property and school taxes, heating costs and half of the co-ownership fees. In short, the total of these costs should not exceed an amount equal to 32% of the buyer’s gross monthly income, including the spouse’s income.
Example – Gross Debt Service (GDS)
| Total gross monthly income (buyer and spouse) | $10,000 |
| GDS ratio (total income × 32%) | $3,200 |
| Scenario A Total monthly property expenses (capital, interest, taxes, heating and 50% of co-ownership fees) |
$2,600 (26%) |
| Scenario B Total monthly property expenses (capital, interest, taxes, heating and 50% of co-ownership fees) |
$3,300 (33%) |
In Scenario A, the buyer qualifies for gross debt service since expenses are below the $3,200 cap. This is not the case for Scenario B, where expenses are above the cap.
In calculating the GDS, the income represents a sort of constant value to which is added a variable based on the price of the immovable, interest rates, amount borrowed and co-ownership fees. Two properties with the same value may generate a different GDS if the interest rates or taxes are not the same or if the amount borrowed is different. Likewise, immovables with different purchase prices can produce the same GDS. A buyer who is starting out must be aware of these changing values and know that he could very well be qualified at one point and no longer qualified a few months later, either because his income has dropped, housing factors have evolved, or other factors related to his financial situation have changed.
Lenders and insurers consider a second ratio to determine a buyer’s affordability, called Total Debt Service Ratio (TDS). This ratio is calculated by taking the total gross income used to calculate the GDS and multiplying it by 40%. The result obtained will then be compared to the total monthly housing expenses, to which is added the monthly total of certain other “financial” expenses of the buyer (ex.: car loan, personal loan, line of credit, student loan, etc.). In short, the total of housing and credit expenses should not exceed an amount corresponding to 40% of the buyer’s gross monthly income, including the spouse’s income.
Example: Based on GDS alone, we see that the buyer in Scenario A would qualify, while the buyer in Scenario B would not. By contrast, the TDS gives us another, more complete picture: since Scenario B buyer’s monthly payments for various debts is much lower than the first buyer’s, their TDS profile ends up being similar.
1 Calculating GDS / TDS, Canada Mortgage and Housing Corporation, https://www.cmhc-schl.gc.ca/en/professionals/project-funding-and-mortgage-financing/mortgage-loan-insurance/calculating-gds-tds, accessed January 30, 2023.
Desired price and market conditions
The desired price is also an analysis of general market conditions and an estimate of the value of properties listed and sold in the recent past that compare to the property being sought. A market with favorable conditions for buyers, with low interest rates and a large inventory of properties for sale, may allow for a slightly higher price or spread to be targeted. Rising interest rates and a scarcity of properties on the market will force the buyer to be cautious by revising his search criteria downward since prices will be inflated and his ability to pay has limits.
Price and taxes
When completing the form Exclusive brokerage contract – Purchase, the broker must indicate the desired price in clause 5.1 in letters and numbers. The broker can also enter a price range, which better reflects the process undertaken.
When beginning his search, the buyer must be aware that tax authorities may impose taxes on the sale of an immovable. An immovable that is new, more than 90% renovated or partly used for commercial purposes may be subject, in whole or in part, to the Goods and Services Tax (GST) and the Québec Sales Tax (QST). These taxes must be paid by the buyer to the seller, who is responsible for collecting them.
The amounts represented by taxes must be taken into account by the buyer when preparing his budget and establishing with his broker the amount he can afford to pay. Taxes can result in reducing this amount or redirecting his search toward non-taxable properties.
The buyer should also be aware that he may be eligible for tax credits in the case of the purchase of a new immovable, if such programs are in place.
The broker must also mention to the buyer that he will have to pay property transfer taxes to the municipality. Here again, the amount can be substantial.
The buyer must understand the difference between the taxes due as a result of the sale and purchase of the immovable, and the taxes collected by the broker on his professional services, which are covered in clause 6.2 of the form Exclusive brokerage contract – Purchase.
Deed of sale and occupancy
As with the brokerage contract to sell, the date of signing of the deed of sale and the date of occupancy are important benchmarks. Although the dates or time frames entered in clauses 5.2 and 5.3 are only an indication, there should be a minimum of forethought as to when the buyer plans to officially become the owner or move into the new property. For some, this will not be an issue in the transaction and they can adjust. For others, it could be important, especially if they have to vacate their home by a specific date or don’t have access to the funds for a down payment until a certain date.
If a date is entered, it must be precise and suitable to the buyer (e.g.: July 10, 2043). If a time frame is specified, it must correspond to a number of days in relation to an event used as a starting point for the calculation, for example 40 days following acceptance of the promise to purchase or five days following the signing of the deed of sale. Expressions such as “to be discussed” or “to be negotiated” are to be avoided. They are vague and could even have consequences in the context of an eventual transaction, where the buyer could use the opportunity to refuse a counter-proposal because it does not exactly match the conditions stipulated in his brokerage contract.
Various conditions related to the purchase price
The buyer could wish to add conditions closely related to the purchase price other than those included in this section of the form.
In an environment of recent significant rises in interest rates, he may, for instance, wish to assume the existing mortgage of a seller who has a lower rate loan whose term does not expire for another few years.
Another example would be looking for a balance of the sale price that can be granted by the seller, which the buyer could see as a way to acquire an immovable for which he would not qualify for full financing.
All these other conditions should be entered in clause 10.1.
Amending the desired price
It can be necessary to increase or decrease the purchase price in the course of the search. If the search conditions evolve in terms of price, a change can be made using clause A2.2 of an Amendments form.
