GDS and TDS – What Does it Imply and What are the New Rules?
Thinking about getting your first Canada mortgage? The mortgage qualification or approval is the first step on the way! During the mortgage qualification stage, the lender evaluates your mortgage application and decides on the eligibility and affordability of your mortgage.
At this time your documents are tested, your credit score may be checked and your income information is taken. The next step is the calculation of the GDS and the TDS, the main metrics to evaluate whether you will be able to keep up with the payments.
The GDS and TDS are two calculations you must know about! Before a lender approves you for a Canada mortgage loan, the first thing they do is calculate whether or not you will be able to make the monthly installments. The GDS (Gross Debt Service) ratio and the TDS (Total Debt Service) ratio take into your account your earnings and expenditure and let the lender decide whether you should be approved for the loan or not.
The Gross Debt Service Ratio
The GDS refers to that percentage of amount of a borrower’s total income that is required for paying off all their housing expenses and basic living needs. These may include your property taxes, heating bills, 50% of the condo fee (if any) and your mortgage payments. The GDS ratio is calculated against your gross income.
The Total Debt Service Ratio
TDS takes things a little further and is used to account for any previous loans on your account as well. The TDS includes the GDS and has other essential expenses of a borrower such as their car loan payments or credit card bills added to it. The TDS is also expressed as a percentage of the borrower’s total income.
Previously, the safe level for the GDS and TDS ratios had been defined as 32% and 40% respectively. However, the Bank of Canada, in an effort to make the rules stricter and stringent and reduce the number of hasty decisions and resulting foreclosures, revised the maximum acceptable figures last year.
New Mortgage Rules and their Affect on the GDS and TDS Ratios
According to the revised mortgage rules following June 2012, the maximum GDS and TDS allowed in order to draw a loan successfully are 39% and 44% respectively.
Typically, these calculations are considered to be one of the main requirements of getting a Canada mortgage loan. However, those people who have a very good credit score may get a little privilege for the GDS. The TDS for them however, is a little increased.
Getting a mortgage approval is perhaps the main and most critical stage of qualifying for a Canada mortgage. It is at this stage that your overall mortgage rate and monthly payments are decided.
Having a decent GDS and TDS ratio makes the situation favorable and feasible for borrowers and help them evaluate in advance whether or not they are ready for a Canada mortgage at the moment.