Qualifying ratios are benchmarks used by lenders to determine the maximum amount of debt a borrower can take on, relative to their income and other financial obligations. The two main qualifying ratios used by lenders in Canada are the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio.
The GDS ratio measures the percentage of a borrower’s gross income that is needed to cover housing-related expenses such as mortgage payments, property taxes, and heating costs. Typically, lenders prefer a GDS ratio of no more than 35%.
The TDS ratio, on the other hand, measures the percentage of a borrower’s gross income that is needed to cover all of their monthly debt obligations, including housing expenses, credit card payments, car loans, and other loans. Lenders generally prefer a TDS ratio of no more than 42%.
Qualifying ratios are important because they help lenders assess a borrower’s ability to repay a mortgage loan. Borrowers with high GDS or TDS ratios may find it difficult to obtain a mortgage loan, or may be offered higher interest rates or shorter amortization periods.
Let’s walk through an example of a homebuyer’s GDS and TDS ratios. In this example we’ll say that the homebuyer has a gross income of $90,000 per year, or $7,500 per month.
They are looking to purchase a home that would require a mortgage payment of $1,500 per month, property taxes of $250 per month, and heating costs of $100 per month. This means their monthly housing-related expenses total would be $1,850.
They also have a car loan payment of $300 per month and credit card payments of $150 per month, for a total monthly debt obligation of $450.
To calculate this homebuyer’s GDS ratio, we divide their monthly housing expenses by their gross income:
GDS ratio = (Monthly housing expenses ÷ Gross income) x 100%
GDS ratio = ($1,850 ÷ $7,500) x 100%
GDS ratio = 24.67%
To calculate the homebuyer’s TDS ratio, we add up all of their monthly debt obligations and housing-related expenses and divide by their gross income:
TDS ratio = (Total monthly debt obligations ÷ Gross income) x 100%
TDS ratio = (($450 + $1,850) ÷ $7,500) x 100%
TDS ratio = 30.67%
In this case, the homebuyer’s GDS ratio is 24.67% and their TDS ratio is 30.67%. Since both ratios are well below the preferred maximums they may be eligible for a mortgage loan and are likely to be offered more favorable terms, such as lower interest rates or longer repayment periods.
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