Mortgage lenders are always on the hunt for new customers. However they also wish to avoid bad debts and costs of foreclosures. They need to be seen as impartial regardless of an applicant’s particular demographic. Their decisions are therefore data-driven and based on statistical ratios.
Borrowers for their part need to understand how these work. This can help them calculate how much they can borrow, and narrow down their search. Moreover, they are then less likely to have failed mortgage applications on their credit records.
Explaining the Basics: Gross Debt Service (GDS) Ratios
A Gross Debt Service Ratio calculates the portion of an applicant’s monthly income potentially committed to monthly housing costs. These include capital repayments on loan amount, interest attached thereto, taxes, and heating expenses. Half of condo fees also count if these apply. A typical simulation of the outcome of a real estate purchase might look like this:
[ ( capital redemption + interest + taxes + heat ) / gross income ] x 100
As a general rule of thumb, the resulting percentage ratio should not be above 35%. Hence a lender may refuse mortgage applications forecasting higher gross debt service ratios.
How Total Debt Service (TDS) Ratios Build on This
A Total Debt Service Ratio extends the GDS by adding all other debt commitments, and hence looks like this:
[ ( capital redemption + interest + taxes + heat + other debt) / gross income ] x 100
‘Other debt’ includes all other obligations including credit cards, car loans, clothing accounts, alimony, etc. As a general rule of thumb, the resulting percentage ratio should not be above 42% according to industry standards.
Taking a Broader Perspective on These Ratios
A couple hoping to purchase their first house should therefore plan several years ahead of their mortgage application. High car repayments can stand in the way of affording a decent house, as can maxed credit cards and clothing accounts. They should ideally ‘clear the decks’ of all consumer debt, and learn to pay cash for their regular purchases.
Total Debt Service TDS and Gross Debt Service GDS ratios are not cast in concrete though. A bank is often more generous to customers they have learned they can trust. Always shop around and compare rates. You will find a wealth of information about the Canadian real estate industry here. Visit our site often. We could help you find a dream home you can afford.
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Mortgage Calculator: Steven Millstein BY CC 2.0
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