The Simple Truth About Your Debt-Service Ratio (DSR)

If you want to borrow money there is a simple way that banks determine if you can afford it. How much of your annual income can comfortably make the payments on what you owe to creditors? Simple, right?

The rule of thumb for unsecured debt (credit cards, loans and lines of credit) is that 42% of your gross annual income must be enough to cover those payments. Take it one step further for mortgages.

Banks – and even more importantly, mortgage insurers (CMHC, Genworth and Canada Guaranty) – need to ensure that you can cover your property expenses as well as your other credit payments.

The Gross-Debt Service ratio (GDS) determines how much of your annual income it takes to cover the property costs on a prospective purchase. These include the mortgage payment, annual property taxes, strata fees (if applicable) and a heating allowance. The rule is that 35% of your gross annual income must be able to cover these costs.

Then there is the second qualifier, the Total Debt-Service Ratio (TDS). This is how much of your annual gross income it will take to cover the property expenses above plus any other payments you are obligated to make on credit cards, lines of credit and or loans. The rule for TDS is that 42% of your annual income must be enough to cover all of this.

Now, if you are responsible with your payments you may get a bit of a break. If your credit score is 680 or higher (good for you) your ratios go up to 39/44. 39% to cover the property expenses and 44% to cover everything.

Here’s the kicker… these ratios are determined using a mortgage payment using the Bank of Canada Benchmark Rate (currently 5.14%) which means you have to prove you can cover payments should mortgage rates go up that high by the time your current mortgage is at maturity. That takes a bite out of pretty much everyone’s purchase power today.

Doesn’t sound so simple now, does it? That’s OK, that’s why I’m here. To help you determine what you qualify for ahead of making the decision to buy. Knowledge is power so let me help.