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My struggle with GDSR and TDSR

I’ve heard these terms thrown around by a few financial institutions from time to time.  Here is a quick look and my quick take on them: 

  • Gross Debt Service Ratio (GDSR) – % income required to pay basic housing costs.

Under the “basic” banner:  mortgage payments (including principal and interest), condo fees (if you have any), property taxes and heating costs.  This sum is divided by your total gross income.  Financial institutions want to see your GDSR under 32%.  This is because spending more than 32% on “basic” housing costs could make it difficult to cover other expenses.  If you exceed 32%, your mortgage application or loan amount would likely be declined.

  • Total Debt Service Ratio (TDSR) - % income required to cover basic housing costs and all other consumer debts.

This is a percentage of your gross monthly income used for housing and other outstanding loans and debts.  Financial institutions want to see your TDSR under 40%, although lenders will usually allow clients to borrow up to this limit.  It would be rare however, if a financial institution would loan money to folks with a TDSR higher than 40%.  Do they?

The struggle I have with GDSR and TDSR is your gross income is your income before deductions.  Gross income is before income taxes, Canada Pension Plan (CPP) and Employment Insurance (EI) premiums and other premiums such as workplace benefits.   For me (and probably for you?) these deductions account for least 30% of my gross income or in other words, income I never see.   While I could rationalize why creditors and institutions would use gross income as the baseline for service ratios, as a debt-holder it doesn’t make any sense to me.   Both ratios are simply way too high for me and border on scary.   With about 70% or less of my take-home pay available to service various debt, I want my total debt ratio under 30% using net income as my denominator.  Personally, I’d like to get my total debt ratio under 20% within the next 5 years.  This debt would include not only my outstanding mortgage but also any car payment.  No line of credit, no credit card debt, nothing else.

As a 30-something saving and investing his way out of debt towards financial freedom that’s a much more comfortable debt ratio I could live with.

What about you? 

Have you ever taken a deeper look at these debt service ratios as they relate to your personal finance situation?   

Filed in: Debt

20 Responses to "My struggle with GDSR and TDSR"

  1. As a 24- year old with a mortage my debt ratios are looking a little rough right now. I sometimes have the temptation to go into super-saver mode and try to be debt-free by 30 (I’m fairly certain I could achieve this), but when I look at the bigger picture I figure I’m way further ahead to start making progress on some investing goals as opposed to paying down debt that is fairly easy to carry at the moment.

    • Hey TM,

      Thanks for checking in!

      I too, want to go into super savings mode now and again, but can’t do it. In my late-30s, there’s lots to see and do in my life so I’m trying to take a balanced approach. At 24, you have some much time to get any debt ratio under control…and good on you!

  2. If I remember correctly, my TDSR peaked at 22% and that seemed scary enough. I suspect that the reason lenders use gross income is that they are willing to lend a higher percentage of take home pay for higher earners. What matters is how much money is left over (after deductions and the 40% for debt payments), and this amount grows slowly with increasing income.

    • Hey Michael,

      I suspect lenders use gross income because they don’t have to worry about tax rates but there could be many other factors as well. I hope my ratio will be next to nothing in another 10 years, then I can delete this post. :)

  3. Phil says:

    I’m in the same boat as TM: I’ve got a new mortgage and a 20-year amortization on it, which means the DSR for the mortgage will be higher than on a 30 year amortization.

    I think it’s natural to have a higher ratio at the “start” of adult life and have it go down as time goes by when you reduce your debts or increase your income.

    It’s easier for the banks to use gross income, because everybody has different deductions and tax rates.

    I remember seeing mine was a little over 32, but the bank let me go ahead because TDSR was the same as GDSR (the mortgage is my only debt).

    On top of that, the income I qualified with doesn’t include bonuses and any other incomes I actually receive, so this ratio isn’t quite accurate. I think it’s a good ballpark, but I don’t really think about it much.

    • Hey Phil,

      Agreed, I think it’s natural to have a higher ratio at the start of life, but it’s nonetheless a bit scary.

      Regarding the gross income, sure, it’s easier for those reasons and I’ve thought of them as well but you don’t live off gross income. :)

      Hopefully my debt ratio will be next to nothing in another 10 years, so no ratio will bother me. Thanks for your comment!

  4. Well, my income’s lower at the moment since I made the jump, but if I base it on previous figures I think I come up with this:

    GDSR = TDSR (because I have no other debts) = 18%. Not sure though; I know on NET income it was around 32%.

  5. ” want my total debt ratio under 30% using net income as my denominator” agreed. It makes a lot more sense to use net income because the deductions can be huge, especially in the eastern provinces!

  6. I was just reading about this in the last Money Sense article…

    I just did my spreadsheet to see where I was at – not something I have really been tracking … My GSR on gross is 22% and on net is 32%. With that said, I actually keep it up as I always accelerate my payments by adding more and I have 8 years left on my mortgage. It’s a way for us to pay the mortgage faster and stay away from a life style inflation.

    I agree that 30% on the gross is quite high.

  7. The rebel says:

    One thing you didn’t consider is that these ratios are calculated using potential debt as well. I am so if you have an loc with no balance but you could borrow upto, 20k, they would add an additional 600 in a payment to your tds. They use three percent of the limit.

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