Most lenders use two ratios as part of
their decision to give you a loan:
GDS
RATIO (Gross Debt Service Ratio):
The percentage of gross annual income required to cover payments associated with
housing. Payments include mortgage principal, interest, property taxes and
sometimes include secondary financing, heating, or condominium fees.
TDS
RATIO (Total debt service ratio):
The percentage of gross annual income required to cover payments associated with
housing and all other debts and obligations, such as car loans and credit
cards.
What percentage does
the lender consider too high?
GDS Ratio -
Most lenders recommend that you spend no more than 27 to 32 per cent of your
gross (before tax) monthly income on combined housing costs. There are some
lenders that do not use this ratio.
TDS Ratio -
According to most lenders, you should use no more than 37 to 40 per cent of your
gross monthly income to service your mortgage and cover other debts and
obligations. We have some lenders that will go to 50 per cent.
Some lenders
have been known to be more flexible on
the ratios if your credit rating is excellent and you have other products
with the bank (investments, RRSPs, RESPs, insurnace, etc.)
Tips:
-
Before applying,
pay off some loans, especially the ones with higher monthly payments
-
Increase your
amortization on the loan to decrease your monthly payments
-
Increase the
size of your down payment
-
Lower your
interest rate, consider a different type of loan to lower your payments
-
Re-think your
target house price, consider the same house in a different neighbourhood.