When a bank says they can, or cannot, make the numbers work, what numbers are they talking about? The majority of people have no idea, they either get pre-qualified just to know how much they can get approved for, or make a wild guess and put an offer on a house and worry about making it work later. So, what makes the numbers work? I hope to shed some light on the subject by explaining the two most important things that mortgage approvals are based on so that you can be a more informed shopper.
The first is the Gross Debt Service (GDS) Ratio, this states that your mortgage payments (principle and interest), your property taxes, heat bill and if applicable 50% of condo fees cannot exceed 39% of your total annual gross income. These are the basics costs of home ownership and a lower ratio makes the lenders more comfortable that you can keep up with paying the bills.
The second is the Total Debt Service (TDS) Ratio. This is everything included in the GDS ratio, plus all other monthly debt obligations like car payments and credit card bills. This ratio cannot exceed 44% of your gross annual income. This is the ratio that kills the most mortgage approvals, especially when it comes to vehicle loans, some vehicle loan payments are so large you may as well be applying for 2 mortgages!
Lets looks at an example, for easy numbers lets say you make $100,000 a year, and your car payment is $1000, That’s already 12% of your income taken up by that one payment, so if you are close on the GDS ratio that payment alone would put you over the TDS ratio. These ratios are federally mandated to the large ‘well known’ banks (or ‘A’ lenders) as a way to protect the Canadian real estate market and all of the industries that are connected to it.
There are two types of Alternative Lenders known as ‘B lenders’ and ‘Private Equity Lenders’ which are less mandated by the government and can therefore work around those ratios mentioned earlier.
Most B lenders are willing to go to 49% GDS and 49% TDS, while Private Equity Lenders are less interested in income than they are in the equity of the property. Both of these lenders will however require bigger down payments and higher interest rates that you would otherwise be paying with an ‘A’ lender, along with any applicable fees they may charge.