Together, with friends at The Loop by Sympatico.ca, we decided that the most commonly misunderstood part of buying a home is the calculations that go along with it. As a result, Mortgage Math was planned and produced for homebuyers at any stage in the buying process.
During your mortgage approval process, a lender has to look at whether or not you can afford the home you want to buy. To do this, lenders use two formulas: gross debt service ratio (GDS) and total debt service ratio (TDS). Both formulas measure your household expenses, potential mortgage payments and outstanding debts. But what are the actual calculations?
Grab a coffee, sit back, and watch as Mortgage Agent Drew Donaldson from Safebridge Financial walks us through the calculations lenders use for GDS and TDS. Then try them out yourself!
If you’re shopping for a home, you’re probably asking, “how much can I afford?” So, it’s important to know how lenders will determine your maximum affordability. We’ve brought in mortgage agent Drew Donaldson to walk you through two calculations: gross debt service ratio and total debt service ratio.
Lenders use two formulas to determine whether you can afford a home. First is gross debt service ratio, or GDS.
Now, let’s run through an example of GDS.
First, you have your mortgage payment. Then, you have your property taxes. Finally, you have your monthly heating cost.
Now, if you’re buying a condo, we’d actually take half that maintenance fee and add that in. But because you’re buying a home, we’re gonna run with this.
Now last, we have what your income is. So that’s a monthly income – $5,417 – that annualizes to $65,000 a year and gives you a final GDS of 28.11 per cent.
Now, since your GDS is 28.11 per cent, it falls within the industry standard of 32 per cent.
Before you’re approved for a mortgage, however, the lender also calculates your total debt service ratio, or TDS.
Now, TDS is very similar to GDS although it takes into account some very important other debts that the client happens to have including, for this example, a car payment. Also, this client happens to have a student loan. Now if they had alimony, credit cards, that type of thing – it would be included in this as well.
Now, we take all of this and divide it by the income, which gives us 36.6 per cent TDS. When referring back to the TDS industry standard of 40%, we can now see that this client would be able to afford this property according to her TDS of 36.6 per cent.
Since this client falls well within the industry standard of both GDS and TDS, they’re well on their way to being approved for a mortgage.