How Gross Debt Ratio & Total Debt Ratio Affect Your Mortgage
The ultimate question to ask yourself when you’re thinking about buying a property is: can you afford it? The fact is, taking on a mortgage means that you will have a significant amount of debt to pay off for several years to come. This is not a bad type of debt to have, but if you’re not financially prepared for taking on a mortgage then you could run into bad debt trouble down the road. So, how do you figure out if the property you’re looking at is affordable? An important factor to take into consideration is your Gross Debt Ratio (GDR) and your Total Debt Ratio (TDR), and how these affect your mortgage. In order to understand both of these concepts fully, let’s take a closer look at each of them.
What Is Gross Debt Ratio?
In short, your GDR is the percentage of your gross annual income that is required to cover all of your housing payments, including the cost of servicing the property. These payments include your mortgage principal, interest, property taxes, heating costs, and in cases such as condominium mortgages, they can also include common element costs such as strata fees.
What Is Total Debt Ratio?
As opposed to GDR, your TDR is the percentage of your gross annual income that is required to cover all of your housing payments, including the cost of servicing the property and any other debts or loans you may have such as credit card debt, car payments, or student loans. This means that your TDR will include the same costs as your GDR, plus the cost of your additional debt payments.
How Does Your GDS Affect Your Mortgage?
The reason that these two figures affect your mortgage is because they tell you how much you can afford to pay for your mortgage each year, and also because they tell lenders whether or not you are the type of person they want to offer a loan to. If you’re currently living debt-free, then your GDS ratio will tell you how much you can spend on a mortgage each year. The calculation for determining your GDS ratio is as follows: take your total annual housing costs and divide that figure by your gross annual income, then multiply that number by 100. Say your housing costs are $16,800 per year, and your gross annual income is $54,000. That would make your GDS ratio 31 percent. For most lenders, this would be good news, since the cut-off for mortgages typically falls around 32 percent GDS.
How Does Your TDS Affect Your Mortgage?
If, on the other hand, you have other debts on top of your mortgage, then lenders will look at your TDS ratio before they approve you for a loan. The calculation for determining this ratio is the same as above, except that you will have to add your other debts into the first figure on top of your housing costs. For TDS, most lenders require you to have a ratio lower than 40 percent.
When it comes to debt ratios, the best approach is to determine what these figures are before you make your mortgage application. That way you will have a chance to correct any financial issues that might need fixing before sending off your application to be evaluated. Most financial institutions will provide online calculator tools that help you to determine these debt ratios. If you’re still not sure what your GDS or TDS ratio is, it might be a good idea to talk to a financial advisor to help you determine if the property you’re interested in is right for you.