Debt Ratios
Take 5 minutes to read the following explanation and another 5 minutes doing some simple math. You’ll save yourself many sleepless nights trying to unravel the mystery of whether or not you will be able to get a mortgage on that property you suspect is beyond your budget…
Debt ratios 101
Debt ratios are a calculation of your debt level as a percentage of your income and expenses. Your debt ratios play an important role in assessing your borrowing capacity for mortgages and other loans.
There are two types of debt ratios: gross debt service (GDS) and total debt service (TDS).
Gross debt service (GDS)
This ratio is used to determine the percentage of your housing costs (annual living expenses) in comparison with your annual income.
For an insured mortgage (where the downpayment is less than 20% of the purchase value of the property), financial institutions require that the gros debt service does not exceed between 32 and 39%.
Living expenses include:
- Monthly costs
- Property tax
- School tax
- Annual heating costs
- 50% of annual condo fees
Figures set the example
The formula
| Annual total of monthly mortgage payments |
| + Property taxes |
| + School taxes |
| + Annual heating costs |
| + 50% of annual condo fees |
| = Total living expenses |
| x 100 |
| = Total |
| ÷ Gross annual revenue |
| = Gross debt service |
Example case study
| Annual total of monthly mortgage costs | 12,000 |
| + Property tax | 6,860 |
| + School tax | 1,000 |
| + Annual heating costs | 1,500 |
| + 50% of annual condo fees | 0 |
| = Total living expenses | 21,360 |
| x 100 | |
| = Total | 2,136,000 |
| Gross annual revenue | 68,000 |
GROSS DEBT SERVICE 32%
In the above case study, the gros debt service falls at the low end of the 32 to 39% range, an acceptable ratio for mortgage approval.
Total debt service (TDS)
This ratio is used to determine the percentage of your total living expenses and other annual financial commitments in comparison with your annual income. The amortized total debt ratio offers a more complete picture of your financial situation because it indicates whether you have the financial capacity to assume all your current expenses, plus the unexpected ones.
According to government norms, this ratio should not be more than 44% for an insured mortgage. Some lenders will accept a lower ratio.
The calculated fees include :
- Living expenses
Tous les autres engagements financiers annuels :
- Annual car payments
- Annual personal line of credit payments
- % of credit cart balance
- Etc.
Example case study
The formula
| Living expenses |
| + Other annual financial commitments |
| = Total annual financial commitments |
| x 100 |
| = Total |
| ÷ Gross annual income |
| = Total debt amortization ratio |
Un exemple en chiffres
| Frais d’occupation | 21,360 |
| + Annual car payments | 2,460 |
| + Annual personal line of credit payments | 1,400 |
| + % of credit cart balance | 1,300 |
| + 50% annual condo fees | 0 |
| = Total annual financial commitments | 26,520 |
| x 100 | |
| = Total | 2,652,000 |
| Total debt amortization ratio | 68,000 |
TOTAL DEBT AMORTIZATION RATIO 39 %
This ratio indicates that 39% of your gross annual income is used for occupancy costs and other current debts. This ratio is generally acceptable to financial institutions, as it is below the 44% limit set by government standards.
It’s very important to take these ratios into account when assessing the price you’re prepared to pay for a property, as they will certainly be taken into consideration by financial institutions when you apply for a mortgage.
