It’s always better to talk to your mortgage expert when trying to figure out your financial situation; connect with us anytime if you have any questions that you're unsure about. It’s much easier and accurate for us to do the calculations for you than to try to dust off the calculator and do it all yourself. If you’re someone who likes to know the ins and outs of how things work instead of simply just excepting what someone says, then this article is for you. But know that there are a lot of mortgage words and some math equations involved.

Debt servicing is your ability to make all your financial payments and obligations. There are two main ratios that lenders examine to decide whether you can afford to take on a mortgage. The first one is called gross debt service ratio or GDS, this is the percentage of your total household monthly income that will cover your housing costs. The second one is called total debt service ratio or TDS which is the percentage of your total monthly household income covering your housing costs and all your combined debts. GDS will be your income compared to the price of financing the mortgage, this includes your mortgage payment, property tax, heating bill, plus a percentage of any condo fees (if relevant).

Here’s the proper way to calculate your GDS

Principal + Interest + Taxes + Heat + Other Debts / Gross Annual Income

Once you figured out the amounts for these ratios the next step is to completely understand that each lender will have guidelines and expectations that outline a maximum GDS/TDS. If you exceed the guidelines this will result in a declined mortgage application. The lower your GDS/TDS the better. The maximum ratios are different for conventional mortgage financing based on which lender you choose and which mortgage product that is being applied for. If you choose a mortgage that is high ratio and mortgage default insurance will be required, the maximum GDS is 39% with a maximum TDS of 44%.

So how does this affect you? Let’s say you are interested in purchasing a property with a monthly payment of $1700 per month and your total yearly income is $90,000 ($7500/mth). The lender would be dividing $1700 x $7500 which equals 0.227%, giving you a total gross debt servicing ratio of 22.7%. Just to clarify when calculating the total principle and your interest when it comes to your payment the government of Canada has come up with a stress test. This requires all applicants to qualify using the governments qualifying rate, which is always higher, not your actual rate. This applies for both fixed and variable rate mortgages and all mortgage applications.

Now let’s think about this; say that in addition to the payments required to purchase this property that you have a car payment of $300 per month, child support payments of $500 per month and with all your credit cards you’re responsible for another $700 per month. In total you’re paying $1500 per month. When you add the $1700 per month you arrive at a total of $3200 per month for all your monthly financial payments. $3200 divided by $7500 equals 0.427%, giving you a total debt service ratio of 42.7%.

Based on your GPS you can easily afford this mortgage. However, when you add in all your other expenses, the TDS exceeds the limit of 42% (if you are applying for an insured mortgage). To qualify it might be an easy answer to shuffle some of your debts to lower payments or maybe you have 10% of the purchase price for a down payment and changing the mortgage structure to 5% down and using that 5% instead to pay out a portion of your debt. This may be exactly what you need to qualify for this mortgage.

Your bank is likely very different than the one above, and working with a mortgage expert will always be the best way to explore all your options. The best plan will always be to rely on the professional advice you will always get from a mortgage expert. While the average person will go through a handful of mortgages over their lifetime mortgage experts do this every day with people just like you, and they know exactly how to get you the best results.

Preparing for your mortgage early on will give you the best results overall. It will always be advisable to go over your application and assess your debt service ratio‘s beforehand, which will give you everything you need to put yourself in the best financial position for your future.

If you still have questions about what you can afford and you want to discuss your GDS/TDS ratios so you’re able to understand the mortgage process in detail don’t hesitate to get in touch with us. As always, it would be a pleasure to get your pre-approval started!

We provide expert mortgage advice to both individuals and businesses. With over 20 years of experience we’ll ensure that you’re always getting the best guidance from top experts in the entire industry.