Why Do Debt Service Ratios Matters?
For most people, a mortgage is the biggest amount of debt that you can carry in your lifetime. With the value of housing going up, relinquishing the stratosphere in several housing demands across Canada are taking on bigger mortgages than usual.
A mortgage holds a significant amount, so mortgage lenders will likely secure their tasks before accepting your application. Besides, lenders utilize debt service ratios while determining whether to accept your mortgage application or not. With the federal government stiffening the rules of mortgage over a couple of years, keeping a wholesome debt service ratios is essential.
Gross Debt Service or GDS Ratio
The Gross Debt Service or GDS ratio covers the part of your take-home compensation required to meet your housing costs each month. Housing prices include your payments on the mortgage, your property taxes, home heating bill, and condo fees that amount to 50% when it applies. Also, you must exert effort to obtain 32% for a GDS or even better if lower.
Calculating Your GDS Ratio
Mortgage lenders utilize the same formula for distinguishing your GDS ratio.
GDS Ratio Formula:
GDS = (PITH + ½ Condo Fees)/Monthly take-home pay x 100
P = Mortgage Principal
I = Mortgage Interest
T = Property Taxes
H = Home Heating
For instance, if you are paying on your mortgage amounting to $1,450, $250 of property taxes, home heating each month amounting to $110 and take-home pay for $6,000, your GDS will look as follows:
GDS = ($1,450 + $250 + $110) / $6,000 x 100 = 30.17%
Granted that your GDS ratio is below 32%, you should have no issue approving for a mortgage for as long you have a satisfactory credit score.
Total Debt Service or TDS Ratio
The TDS ratio is similar to the GDS ratio. The TD ratio still holds your housing costs each month or your mortgage payment and other monthly fees. However, though it may seem manageable, it will still equate to the amount of debt you’re paying monthly.
Calculating Your TDS Ratio
Similar to the idea of GDS, mortgage lenders utilize similar TDS ratio when distinguishing whether to accept your mortgage application.
TDS Ratio Formula:
TDS = (PITH + ½ Condo Fees + Monthly Debt Payments)/Monthly take-home pay x 100
For instance, if you’re paying mortgage amounting to $1,450, $250 of property taxes, home heating bill costing to $110, car loan amounting to $500 and take-home pay each month amounting to $6,000, your TDS will look as follows:
TDS = ($1,450 + $250 + $110 + $500) / $6,000 x 100 = 38.50%
Now, your TDS ratio is lesser than 40 %, it conveys that you can afford to pay your home each month.
As you take a look at your debt servicing ratios, in the long run, this will distinguish if mortgage lenders will accept your loan. Besides, debt service ratios are necessary, this is not the only factor that lenders consider. Some factors may incorporate your credit score and your LTV or loan-to-value ratio. If you’re saving for a bigger down payment and increasing your credit score, it can increase your chances of you getting accepted on your mortgage.
CONSUMER PROPOSAL EXAMPLE
Example Unsecured Debts
|2||Credit card 1||$6,812|
Your Monthly Repayments Would Be
a Consumer proposal $748
(total contractual repayments)
a Consumer proposal $295
(total contractual repayments)
* Subject to creditor acceptance
* Payment subject to individual circumstances
* Credit rating may be affected
* Fees apply, subject to individual's circumstances.