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Navigating the world of mortgages can be complex, especially when trying to understand the role of debt ratios. Your gross debt service (GDS) and total debt service (TDS) ratios are vital in determining your mortgage loan eligibility. Whether you’re a first-time homebuyer or a seasoned homeowner, a solid grasp of these concepts is essential for making informed decisions about your future budget. In this comprehensive guide, we’ll unpack GDS and TDS ratios and how they impact your mortgage.
When assessing your mortgage affordability, one of the most crucial factors lenders consider is your debt service ratio (DSR). The DSR is a financial metric that helps determine your ability to manage your debt based on your income. It’s a key indicator of your likelihood of making timely mortgage payments. There are two debt service ratios to understand: Gross debt service (GDS) and total debt service (TDS). Let’s break each of these down:
Think of the GDS ratio as a measure of how much income goes towards housing-related expenses. It considers your mortgage principal and interest payments, property taxes, heating costs, and other fees.
To calculate your GDS ratio, divide your total housing expenses by your gross income and multiply the result by 100 to get the percentage:
[Total Housing Expenses / Gross Income] x 100 = GDS
Lenders usually have a maximum GDS ratio threshold, typically around 30% to 39%. Going above this threshold might raise concerns about your ability to afford your mortgage payments.
Unlike the GDS ratio, the TDS gives a broader picture of your debt obligations. It considers your housing expenses and other monthly payments, like credit card bills, car loans, lines of credit, and other outstanding debts.
To calculate your TDS ratio, divide your total debt payments by your gross income and multiply that result by 100:
[Total Debt Payments / Gross Income] x 100 = TDS
Just like the GDS ratio, lenders usually have a maximum threshold for the TDS ratio, typically ranging from 40% to 44%. A higher TDS ratio indicates that a larger proportion of your income goes to debt payments, which could impact your eligibility for a mortgage.
Understanding and calculating your GDS and TDS ratios are crucial in determining how much you can afford in a mortgage. By staying within the acceptable range, you demonstrate your financial capability to handle the responsibilities of homeownership — which lenders love to see! Here are some other benefits of understanding GDS and TDS ratios:
To estimate your monthly mortgage payments, you can use an online calculator. Have the following information handy: Purchase price, down payment, interest rate, and amortization period (the time it takes to pay off the loan).
When estimating your mortgage, you should keep your DSRs in mind. Ensure that your estimated mortgage payment, along with your other debt payments and housing expenses, stay within the acceptable limits of the thresholds set by lenders. This helps you maintain a healthy balance between income and debt, reducing the risk of financial difficulties.
Exceeding your debt service ratio limits can significantly affect your mortgage application. When you surpass these limits, lenders may be concerned about your ability to manage debt while meeting your mortgage obligations. Potential consequences include:
Your debt service ratios are essential benchmarks for estimating mortgage payments and ensuring financial stability. If you find it challenging to balance income and debt, that’s okay! Whether you feel overwhelmed by these calculations or just need some advice, reach out to me today. Together, we can look at your ratio levels and determine a course of action for your mortgage.
Andrew Thake is a seasoned mortgage broker with over 15 years of industry experience. He’s assisted more than 2,200 clients in finding their ideal mortgage solutions. Recognized for his excellence, Andrew has received high honours and awards, including the National Rookie of the Year from TD Canada Trust and recognition as a Top 10 Ottawa Mortgage Broker in 2023. He has also been inducted into the Hall of Fame at Dominion Lending Centres and has consistently received their Platinum Award during his tenure as a mortgage broker.
Andrew’s dedication lies in serving his clients and prioritizing their needs with an empathetic approach. Throughout the application process, he provides tailored, informed, and efficient services to ensure the best mortgage solutions for his client’s unique circumstances. The best part of Andrew’s job is when he gets to see the joy on his clients’ faces following their mortgage approval.
