Mortgage Ratios

Do you want to own a cosy little home, but the thought of getting a mortgage makes you feel a little overwhelmed? Don't worry, we'll take care of you! Lenders look at three important ratios before deciding whether or not to approve your mortgage application:


  • Loan to Value (LTV)


  • Gross Debt Service Ratio (GDS)


  • Total Debt Service Ratio (TDS) 


Let's look at what each of these ratios means and how they can affect whether or not you get a mortgage.


Loan to Value (LTV)


LTV is the loan amount relative to the value of the property.  


LTV can be used for two purposes.  For example, if a borrower is seeking a mortgage of $200,000 on a property appraised at $250,000, the LTV would be 80% ($200,000/$250,000).


LTV can be expressed in two ways.  The first is most commonly used.  


a) The LTV of a mortgage.  This is calculated by dividing the mortgage amount by the appraised value of the property.  This is usually expressed as a percentage.  In the example above the LTV ratio is 80%.    


b) LTV as a maximum mortgage amount.  It is the LTV percentage multiplied by the value of the property.  This is usually expressed as a dollar value.  In the example above, the maximum mortgage amount is $200,000.   


Gross Debt Service Ratio (GDS)


GDS is the ratio of debt to income expressed as a percent.   GDS is used to determine if the proposed mortgage payment is within a lender’s maximum GDS ratio.  GDS looks at the borrower’s shelter costs divided by their gross income.  Shelter costs include the mortgage payment amounts (principle + interest), property tax, heat and ½ the condo maintenance fee if the property is a condo.     


GDS = [(PITH + ½ Condo Maintenance fee) / Gross Income] x 100


PITH is Principal, Interest, Property Taxes, and Property Heat.


Gross Income is the potential borrower’s total income before paying income taxes.  Rental income can be sometimes used in the calculation of gross income.   


Total Debt Service Ratio (TDS)  


TDS is similar to GDS, but includes all other debts that the borrower has. 


The TDS has two main functions. It can be used to: 


1) Determine the maximum mortgage payment that the borrower can afford.


2) Verify that the mortgage payments fall within the lender’s TDS ratio.  TDS is often used to pre-qualify a potential borrower, it is necessary to determine the amount of a mortgage payment that he or she can afford based on the TDS calculation, and then use that payment amount to determine the maximum mortgage amount.


Pre-qualifying a potential borrower 


TDS = ((PITH + ½ Condo Mtc. Fee + Other Debts) / Income) x 100


Other debts include: loans, lines of credit, car leases, mortgage payments, credit card payments, child support, and alimony.


Other debts do not include: food, clothing, entertainment, investment contributions, car insurance, property insurance, life insurance, and childcare expenses.  


Maximum GDS and TDS ratios 


Typically, GDS is targeted at 32% and TDS at 40%.  CMHC allows borrowers to reach debt service ratios of 39% (GDS) and 44% (TDS).


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