#6 - Debt Ratios are Too High

There are two debt ratios the banks use to determine if they will approve your mortgage application, or not.

The first is your Gross Debt Service Ratio (GDS). This calculation is calculated by adding your monthly mortgage payment, monthly property Taxes, $100 per month for utilities, and any condo or lot rental fees. Take that figure and then divide it by your Gross Monthly Income. The maximum GDS is typically 32%.

The second is your Total Debt Service Ratio (TDS). Thic calculation is similar to the GDS calculation. You add the same items as in the GDS calculation + your monthly credit card and loan payments. Take that total and divide it by your Gross Monthly Income. The maximum TDS is typically 40%.

There are a number of ways to improve your GDS and TDS calculations. To lower both your GDS & TDS ratios, you can:
- buy a less expensive home
- stretch the amortization out longer
- get a better interest rate mortgage through a mortgage broker
- get a mortgage with a term of 5-years or longer to avoid needing to meet CMHC's requirement to qualify using teh Bank of Canada 5-year posted rate

To lower your TDS ratio you can also:
- pay off a loan or credit card
- refinance a loan with a small balance but a big payment
- get a $0 down payment mortgage and use your cash to pay off other debt
- if refinancing, consolidate some debts into the new mortgage

If you can improve your credit score sufficiently, most lenders will disregard the GDS ratio and allow your TDS ratio to go up to 44%.

A qualified mortgage broker can give you specific advise on your unique situation.