When it comes to mortgages, whether you’re buying a home, or refinancing an existing property, there are 3 main ratios you need to know about that can affect your ability to secure financing. The first two are related to the ratio of debt a person carries in relation to their income, and housing. The 3rd is the ratio of how much mortgage you’re asking for in relation to the value of the property.
1. GDS – Gross Debt Servicing.
This is the percentage of your gross income that go towards paying your mortgage and housing related costs. It’s calculated by factoring in what is known as PITH
Principal, Interest, Taxes, Heat.
Ideally, your GDS ratio should remain at or below 32%. If it’s higher than that, it may mean looking to a lender that accepts higher debt ratios. This could mean additional lending fees and a higher interest rate on your mortgage.
2. TDS – Total Debt Servicing.
This is the percentage of your gross income that go towards paying your mortgage and housing related costs as well as all other debts a person may be carrying. This could include credit cards, lines of credit, car loans or any other registered debt.
Ideally, your GDS ratio should remain at or below 44%. If it’s higher than that, it may mean looking to a lender that accepts higher debt ratios. This could mean additional lending fees and a higher interest rate on your mortgage.
3. LTV – Loan to Value.
This is amount of the loan you’re looking for as a percentage of what the property is worth. It’s used as a risk assessment by lenders before they approve your mortgage. If you’re looking for a loan with an LTV above 80% (ie. A $100,000 home and you’re looking for a 90,000 mortgage – that would be a 90% LTV ), mortgage insurance (CMHC/Genworth/Canada Guarantee) would be required at your expense to protect the lender. If you are asking for a mortgage with less than 80% LTV, the lender may also purchase mortgage insurance, but at their expense.
When looking for a mortgage the 3 ratios that come to play are GDS/TDS/LTV. If you’re GDS/TDS are below 32% and 44% respectively you are viewed as a lower risk and open to better interest rates from lenders. Higher ratio’s can mean higher rates and often additional lender fees.
If your LTV is higher than 80% you will be required to pay an insurance premium to protect the lender.
Keeping your debt ratios in line, in addition to a healthy credit score, can save you thousands of dollars in mortgage interest and fees.
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