Mortgage Tips- Debt Service Ratios

When talking about mortgages, you soon hear the terms GDS and/or TDS used. These are debt service ratios that lenders use to determine if you have the capacity to repay the mortgage you are applying for. This is how they work.

GDS stands for Gross Debt Service. Most lenders follow the policy that your housing costs (eg. your mortgage) should not exceed 32% of your gross income. Specifically, your monthly mortgage payment, your taxes, and your heating are considered as the costs. This figure is compared with your gross income, and if it exceeds 32% most lenders will not consider you.

TDS stands for Total Debt Service. The same kind of thinking is used here, except all your monthly obligations are compared against your gross income. Your monthly obligations include your mortgage payment, property tax, car loan, credit card payments etc. This total monthly obligation should not exceed 40% of your gross income.

The lenders are not the only ones insistent on these ratios. Canadian Mortgage and Housing Corporation (CMHC, and GE Capital, the two companies that insure mortgages for the lenders also insist on these ratios. If you are prevented from closing a deal because your ratio is too high, it may seem like these figures are only a negative restriction, but they do have their positive side as well.

The GDS and TDS ratios are there for the protection of the lenders and their insurers, but they are also there for your protection. They help ensure that the naïve home buyer does not get in over his/her/their head in terms of the mortgage they tackle. You may feel you can handle a bigger debt load, but the ratios are adhered to. It means you get your mortgage and then buy that new car, take that vacation or make that other major purchase. Once the mortgage is finalized, you only have to worry about those ratios being down again by the next renewal time.