This weeks industry term which is used all the time, is GDS or the Gross Debt Service Ratio. What is it and what does it mean for your mortgage?
The Gross Debt Service Ratio is another fairly simple calculation and reflects your base shelter costs (or potential base shelter costs). This is one of the calculations that Mortgage Brokers use to pre-qualify clients and give them a purchase price they should focus on while out home shopping.
The current industry standard is a GDS ratio of 39%; which means that the base shelter costs must be less than 39% of the monthly income; before taxes in order to be qualified for the mortgage. There are exceptions to the rule (extended ratios); however, these are only available for un-insured mortgages (+20% down) and are specific to certain products and lenders. It should be noted that the calculation includes the ‘qualifying’ mortgage payment; not necessarily the actual mortgage payment. The qualifying mortgage payment is calculated using a higher interest rate (BOC Benchmark) and helps to ensure that homeowners can afford higher mortgage payments should rates increase! The calculation below uses monthly figures.
GDS = (((Mortgage Payment (P&I) + Taxes (T) + Heat (H)) + 1/2 Condo Fees) / Gross Income) x 100
Example – ((($1,500 (P&I) + $250 (T) + $120 (H)) + $200 (1/2 CF)) / $6,000 (GMI)) x 100
(($1,870 (PITH) + $200) / $6,000) x 100
($2,070 / $6,000) x 100
0.345 x 100 = 34.5% GDS or Gross Debt Service
In the above scenario; the GDS would be acceptable to most lenders and insurers and would lead to an approval as long as all other aspects of the application were acceptable. Even though a GDS of 39% is the industry standard; a low credit score or poor history may lead to the requirement of a lower GDS in order to be approved by some lenders or insurers. As important as the GDS ratio is to a mortgage application; it must fall in line with all other parts of the clients profile!
Check in next Monday where we will discuss TDS or Total Debt Service Ratio!
Published by Tyler Cowle