This debt service ratio calculator helps you calculate Gross Debt Service (GDS) and Total Debt Service (TDS) ratios. These two ratios are key in determining home affordability in Canada.
What are debt service ratios?
Debt service ratios help to understand the relationship between income and the ability to service debt payments. Lenders often look at debt service ratios to determine how much money they would be able to loan you. These ratios are important when purchasing a home as lenders will limit the amount you can borrow so you do not exceed maximiums set for these ratios.
The GDS & TDS ratios are used in calculation of the stress test which will limit the total home you are able to afford based on your income and debt outstanding.
Gross Debt Service (GDS) calculation
The maximum gds ratio in Canada is 39% as outlined by the CMCH. This percentage represents what home costs should not exceed. Without mortgage insurance lenders may require a lower ratio in the 32-35% range.
GDS is calculated taking into consideration principal, interest, property taxes and heating which is also known by PITH. If you are purchasing a condo then the condo fees will be taken into the calculation.
Gross Debt Service (GDS) ratio = [(PITH + 50% Condo Fees) / Gross Monthly Income] X 100
Total Debt Service (TDS) calculation
Total Debt Service (TDS) ratio = [(GDS Housing Costs + Other Monthly Debt Payments) / Gross Monthly Income] X 100
The maximum TDS ratio is 44% however without insurance lenders may require a lower ratio in the 40-42% range.
In addition to debt service ratios it is also important to understand other costs associated with purchasing a home such as land transfer tax.
How can you improve your debt service ratios?
There are a few ways that you can help to reduce your debt service ratios which will help increase mortgage affordability. The first way to reduce debt service ratios involves paying down non home related debt such as credit cards and other loans. Since the calculation is based on income, increasing income will help improve your debt service ratios. A lower home price, which will result in a smaller mortgage will also help to increase both your GDS & TDS ratio. Since these ratios take into consideration the interest you pay for your mortgage, a more favorable rate can help reduce this ratio. Lastly a longer amortization period will lower your mortgage payment and debt service ratios as a result.