Debt Service Ratios
Mortgage professionals use two main ratios to decide if borrowers can afford to buy a home: Gross Debt Service (GDS) and Total Debt Service (TDS). The calculation used compares the potential borrower’s current housing debt along with other cost of living expenses.
With this new change, CMHC is requiring that borrowers have a higher income/budget to ensure they can pay their monthly mortgage payments.
To simplify what this means, potential borrowers should be keeping a closer eye on their overall household debt. To decrease your debt service ratios, you will have two choices – increase your income or lower your existing debt.
What is Gross Debt Service Ratio?
The gross debt service (GDS) ratio is a debt service measure that financial lenders use to assess the proportion of housing debt that a borrower is paying in comparison to their income. The gross debt service ratio is typically a comprehensive measure of all of a borrower’s monthly housing expenses. [source: Investopia]
What is Total Debt Service Ratio?
The total debt service ratio (TDS) is a debt service measurement that financial lenders use as a rule of thumb when determining the proportion of gross income that is already spent on housing-related and other similar payments. Lenders consider each potential borrower’s property taxes, credit card balances, and other monthly debt obligations to calculate the ratio of income to debt. [source: Investopia]
Calculate GDS / TDS