Debt service ratios are used by lenders to determine if you have the capacity to make payments on a loan or mortgage.
In its simplest terms, your debt ratio is calculated by dividing your monthly debt by your monthly income (before taxes). If your percentage of debt compared to your income is too high, it may be difficult for you to manage the payments of a mortgage or another loan. This does not necessarily mean you won’t qualify for a loan, but it is something that a lender considers.
There are two ratios used:
- Gross debt servicing (GDS) is the maximum shelter costs you can afford each month
- Total debt servicing (TDS) is the maximum debt payments you can afford each month
Gross debt servicing (GDS)
GDS is used to determine if too much of your income is spent on housing expenses. Generally speaking, your GDS should not exceed 30% of your income.
|GDS = (Total shelter costs x 100) / Gross income|
Total debt servicing (TDS) TDS is used to determine if too much of your income is spent on housing expenses and debt payments. Generally speaking, your TDS should not exceed 40% of your income.
|TDS = (Total shelter costs + debt payments x 100) / Gross income|
Total shelter costs include the monthly costs for:
- Mortgage payment or rent
- Property taxes
- 50% of condo fees
Debt payments include the monthly costs for:
- Loan payments
- Credit card payments (3% of outstanding balance)
- Line of credit payments (interest charges)
Gross income is your income before deductions.
If you are married you should use the combined value of your income and debt payments.