How Do GDS and TDS ratios impact your ability to afford a home in Toronto?
Understanding Gross Debt Service (GDS) and Total Debt Service (TDS) ratios is crucial when it comes to determining your ability to afford a home in Toronto. As an experienced real estate agent, I’m here to help you understand the implications of these ratios and how you can best manage them.
In this blog post, I’ll go review what GDS and TDS ratios are and how they impact your ability to afford a home in Toronto. I’ll also cover best practices for managing these ratios and maximizing your chances of getting approved for a mortgage.
What are Gross Debt Service (GDS) and Total Debt Service (TDS) ratios?
Gross Debt Service (GDS) and Total Debt Service (TDS) ratios are two important metrics used by lenders to determine your ability to repay a mortgage loan.
What is the Gross Debt Service (GDS) ratio?
Your GDS ratio measures the percentage of your gross income that goes towards your housing expenses. This includes your mortgage payments, property taxes, heating expenses, and 50% of any condo fees.
In Toronto, most lenders require a GDS ratio of 35% or less. This means that your housing expenses should not exceed 35% of your gross income.
What is the Total Debt Service (TDS) ratio?
Your TDS ratio measures the percentage of your gross income that goes towards your housing expenses and other debts. This includes your housing expenses (as calculated by your GDS ratio) as well as any other debt payments, such as car loans or credit card payments.
In Toronto, most lenders require a TDS ratio of 42% or less. This means that your housing expenses and other debt payments should not exceed 42% of your gross income.
How do GDS and TDS ratios affect your ability to afford a home in Toronto?
GDS and TDS ratios are important because they determine how much mortgage you can afford. If your ratios are too high, it may be difficult to get approved for a mortgage or to find a home that fits within your budget.
For example, let’s say you have a gross income of $80,000 per year. To calculate your maximum housing expenses under a GDS ratio of 35%, you would multiply your income by 0.35:
$80,000 x 0.35 = $28,000
This means that your total housing expenses, including your mortgage payment, should not exceed $28,000 per year, or approximately $2,333 per month.
To calculate your maximum total debt expenses under a TDS ratio of 42%, you would add up your housing expenses (as calculated by your GDS ratio) and any other debt payments, and multiply the total by 0.42.
For example, let’s say you have a car loan payment of $300 per month. To calculate your maximum total debt expenses, you would add your housing expenses ($2,333) to your car loan payment ($300), for a total of $2,633 per month.
$2,633 x 0.42 = $1,105
This means that your total debt expenses should not exceed $1,105 per month.
If your housing expenses and other debt payments are too high, it may be difficult to find a home that fits within your budget or to get approved for a mortgage at all.
Tips for managing your GDS and TDS ratios
Managing your GDS and TDS ratios is important if you want to maximize your chances of getting approved for a mortgage and finding a home that fits within your budget.
- Reduce your debt: One of the most effective ways to improve your GDS and TDS ratios is to reduce your debt. This includes paying off credit card balances, car loans, and other debts. The less debt you have, the more income you have available to put towards your housing expenses. If you’re struggling with debt, there are a few things you can do to get back on track. Start by creating a budget and cutting back on unnecessary expenses. Look for ways to increase your income, such as taking on a second job. And consider speaking with a financial advisor or credit counselor for additional guidance.
- Increase your down payment: Another way to improve your GDS and TDS ratios is to increase your down payment. A larger down payment means that you’ll need to borrow less money to purchase your home, which can reduce your monthly mortgage payment and improve your ratios.In Canada, the minimum down payment required for a home purchase is 5% of the purchase price. However, if you can afford to put down more than 5%, it may be worth considering. Not only can it help improve your ratios, but it can also reduce the amount of interest you’ll pay over the life of your mortgage.
- Choose a less expensive home: If you’re struggling to find a home that fits within your budget, it may be worth considering a less expensive property. While it can be tempting to stretch your budget to buy your dream home, it’s important to remember that your GDS and TDS ratios are based on your income, not your aspirations. Choosing a less expensive home can help ensure that you can comfortably afford your mortgage payments and other housing expenses.
- Shop around for a mortgage: It’s important to shop around for a mortgage that fits within your budget. Different lenders may have different requirements for GDS and TDS ratios, and you may be able to find a lender that is willing to work with your unique financial situation. When shopping for a mortgage, be sure to compare interest rates, terms, and fees. And don’t be afraid to negotiate with lenders to try to get the best deal possible.
Conclusion
Gross Debt Service (GDS) and Total Debt Service (TDS) ratios are important metrics used by lenders to determine your ability to afford a mortgage. By managing your debt, increasing your down payment, choosing a less expensive home, and shopping around for a mortgage, you can improve your ratios and maximize your chances of getting approved for a mortgage in Toronto.
While managing your Gross Debt Service (GDS) and Total Debt Service (TDS) ratios is crucial to affording a home in Toronto, it’s important to note that there is another important factor to consider – the mortgage stress test.
The mortgage stress test is a federal requirement that all borrowers must pass before they can qualify for a mortgage. The test is designed to ensure that borrowers can afford their mortgage payments in the event of an interest rate increase or other financial shock.
My recommendation is to carefully consider your financial situation and work with a professional to help you navigate the home buying process. With the right planning and preparation, you can find a home that fits within your budget and achieve your dream of homeownership in Toronto.
