We all do, at some point, incur some–or a lot–of debt.  Whether it’s credit cards, student loans, or car loans,  your ability and capacity to manage those debts will ultimately be one of the most–if not, the most–critical component of your mortgage application.

You will often hear the term Debt Service Ratio when applying for a mortgage.  This is what the banks and mortgage insurers (CMHC, Genworth Financial, and Canada Guaranty–formerly AIG) use as a guideline to determine how much debt you can manage in relation to your household income.

Debt

To calculate your GDS, lenders try to figure out the proportion of your income you would be paying each month to own a particular property. First, the lender will estimate your annual mortgage payments, property taxes, heating costs and 50% of your condo fees (if applicable). The lender will then add that up and divide it by your gross annual income. If the answer equals less than 32 per cent (industry standard), the lender can feel confident in your ability to pay your monthly housing costs.

To calculate your TDS, the lender will take the same GDS calculation but add in any other monthly payments you might have to make, including loans or the minimum payments on any credit card debt. So, the lender adds together your mortgage payments, property taxes, heating costs, 50% of your condo fees and debts, and divides the total by your gross annual income. If the answer equals less than 40 per cent (industry standard), the lender will know you have the money to make all of your monthly payments and you will be on track with getting approved for a mortgage.

If either of your answers go over than the industry standards, you may want to save more for your down payment and/or pay off some existing debt before buying. However, the 32% GDS and 40% TDS standards are guidelines, not rules. If you have a high credit score or some valuable assets, you may still qualify for a mortgage, even if your GDS and TDS are slightly higher than the industry standards.