• Everyday we hear about our national debts, personal debts and just debt in general and I thought it would be a great idea if we could delve into debt a little more and understand how it affects us in our everyday lives.

    GDS and TDS are your debt ratios. Why are they important? Lenders look at these two ratios amongst other variables, when making their decisions on whether to approve a loan or not.

    Many borrowers think that their credit bureau scores are the most important factor when being considered for a loan – this is only an indicator and cannot tell your whole story!ID-100213554-1

    GDS stands for Gross Debt Service ratio and it is the percentage of the borrower’s income that is needed to pay all required monthly housing costs (mortgage payment, property taxes, heat and 50% of condo fees). The acceptable ratio is 32%.

    TDS stands for Total Debt Service ratio and it is the percentage of the borrower’s income that is needed to cover housing costs (GDS) plus any other monthly obligations that a borrower has, such as credit card payments and car loan payments. The acceptable ratio is 40%.

    GDS and TDS are very important to understand when shopping around for a mortgage. There’s more to think about than simply finding the best mortgage rates. You need to also consider the size of your down payment and whether or not you can afford the home and your monthly mortgage payments. But that’s not all – what about your other costs, such as credit card payments, car loans, alimony and other debts you might have?

    Knowing your GDS and TDS can be the first step in this process.

    Calculating your GDS

    To calculate your GDS, a lender will combine your monthly housing-related costs (Principal, Interest, Property Taxes, and Heating), then divide those costs by your gross income. That figure is then multiplied by 100, resulting in your GDS percentage.

    GDS = (PITH + ½ condo fee)/Gross income x 100%

    PITH (Principal, Interest, Property Taxes, Heating)

    Let’s run an example:

    Gross annual salary – $75,000 (before taxes)

    Cost of Condo – $250,000

    Down Payment – $50,000 (20% – we will run the max for this example, so CMHC fees are omitted)

    Monthly mortgage payment – $1185.53 (based on 25 year amortization at 3.00% – monthly payments)

    Condo Fees – $300/month

    Annual Property Taxes – $2200

    Monthly heating costs – $70 (for illustration purposes only)

    Now we need to know the annual costs:

    Annual Mortgage payments – $1185.53 x 12 = 14,226.36

    Annual Condo Fees – $300 x 12 = $3600/2 = $1800

    Annual Property Taxes – $2200

    Annual Heating Costs – $70 x 12 = $840

    GDS = (PITH + ½ condo fee)/Gross income x 100%

    GDS = $14,226.36 + $2200 + $840 + $1800/$75,000 x 100%

    GDS = $19066.36 / $75,000 x 100%

    GDS = 25.42%

    In this example, the GDS falls under the acceptable industry standard of 32%, so you would qualify for a mortgage. But you need to also know the TDS as they work hand in hand.

    Calculating your TDS

    In addition, to the costs noted in the GDS section, you also account for your debts such as credit card payments, car loan payments, alimony, etc. Things like RRSP contributions, insurance – life, car, disability, etc, are not included.

    Monthly car loan payments – $250/month

    Monthly credit card payments – $200/month

    Monthly student loan payments – $200/month

    Again you need to convert these to annual costs:

    Annual car loan payments – $250 x 12 = $3,000

    Annual credit card payments – $200 x 12 = $2,400

    Annual student loan payments – $200 x 12 = $2400

    TDS = PITH + ½ condo fees + Other debts/Gross Income x 100%

    TDS = $14,226.36 + $2200 + $840 + $1800 + $3000 +$2400 + $2400/ $75,000 x 100%

    TDS = $26866.36 /$75,000 x 100%

    TDS = 35.82%

    In this example, the TDS falls under the acceptable industry standard of 40%, so you would qualify for a mortgage.

    Now what happens if you don’t fall into the acceptable industry standards and can’t qualify for that mortgage? Your GDS and TDS scores are too high?

    You can do a few things:

    You can increase your down payment: in this example, I ran the calculations with a 20% down payment to avoid adding the CMHC fees. Unfortunately many people are not able to put 20% down but increasing your down payment can help bring up your GDS and TDS scores.

    Reduce your Overall Debt: suggestions were covered in my blog article: http://renthouse2own.ca/blog/index.php/2013/06/13/5-ways-to-lose-your-debt/

    Increasing your household income: if you are putting only your income on the application, you can increase it by adding your spouse (assuming they are employed) or getting a co-signer (do your research and know your rights).

    Select a property that is less expensive: knowing your debt level ratios should be a clear indication of what you can afford. Look at different scenarios with different price levels to know what you can manage.

    Knowing where you stand in all financial transactions, will keep you one step ahead of the game and keep your debts manageable as well as assist you in saving for the future and also for that mortgage of your dreams!

    To Your Wealth!

    Do you like this post? If so, please “like” us on our Facebook page at https://www.facebook.com/aminasmortgageservices Please follow me on twitter at https://twitter.com/aminasmortgages