Difference Between Debt Servicing Ratio and Total Debt Servicing Ratio

Debt Servicing Ratio (GDS) and Total Debt Servicing Ratio (TDS) are two important measures of a borrower's ability to repay their debts. Both ratios are used by lenders, such as banks and mortgage companies, to determine a borrower's creditworthiness and ability to repay a loan. However, there are significant differences between the two ratios, and it is important to understand how they are calculated and what they measure.

What is Debt Servicing Ratio (GDS)?

Debt Servicing Ratio (GDS) is a measure of a borrower's ability to repay their mortgage. It is calculated by dividing the borrower's gross monthly income by the total amount of their monthly mortgage payments, including principal, interest, taxes, and insurance. The result is expressed as a percentage, and lenders typically require that a borrower's GDS be no higher than 35%. This means that a borrower's mortgage payments should not exceed 35% of their gross monthly income.

What is Total Debt Servicing Ratio (TDS)?

Total Debt Servicing Ratio (TDS) is a measure of a borrower's ability to repay all of their debts, including their mortgage and other loans such as credit card debt and car loans. It is calculated by dividing the borrower's gross monthly income by the total amount of their monthly debt payments. The result is expressed as a percentage, and lenders typically require that a borrower's TDS be no higher than 42%. This means that borrowers' total debt payments should not exceed 42% of their gross monthly income.

Differences between GDS and TDS

The main difference between GDS and TDS is the types of debts that are included in the calculation. GDS only includes the borrower's mortgage payments, while TDS includes all of the borrower's debt payments. This means that a borrower with a high TDS may still be able to qualify for a mortgage, even if their GDS is above 35%. Additionally, TDS is a more comprehensive measure of a borrower's overall debt burden and ability to repay all of their debts, while GDS is focused specifically on a borrower's mortgage payments.

Importance of GDS and TDS

GDS and TDS are important measures of a borrower's ability to repay their debts, and they are used by lenders to determine a borrower's creditworthiness and ability to repay a loan. They are also used to set lending guidelines and mortgage qualifications, and they help to ensure that borrowers are able to afford the loans they take out. Additionally, GDS and TDS are used by government agencies and financial regulators to monitor the overall health of the housing market and to ensure that borrowers are protected from predatory lending practices.

How GDS and TDS are used by lenders

Lenders use GDS and TDS to determine a borrower's creditworthiness and ability to repay a loan. They typically require that a borrower's GDS be no higher than 35% and that their TDS be no higher than 42%. This means that borrowers' mortgage payments should not exceed 35% of their gross monthly income, and their total debt payments should not exceed 42% of their gross monthly income. Lenders also use GDS and TDS to set lending guidelines and mortgage qualifications, and they may use these ratios to approve or deny loan applications.

How GDS and TDS affect borrowers

GDS and TDS can have a significant impact on borrowers, as they are used by lenders to determine a borrower's creditworthiness and ability to repay a loan. A high GDS or TDS can make it difficult for a borrower to qualify for a mortgage or other loan, and it can also result in higher interest rates and loan fees. Additionally, a high GDS or TDS can limit a borrower's ability to borrow money in the future, as lenders may view them as a higher risk. On the other hand, a low GDS and TDS can make it easier for a borrower to qualify for a mortgage or other loan and can result in lower interest rates and loan fees.

Mortgage Broker Burnaby Specialize In Private Mortgage Financing

Mortgage Broker Burnaby has a year of experience in the field of private mortgage financing. Debt Servicing Ratio and Total Debt Servicing Ratio are important measures of a borrower's ability to repay their debts, but they are calculated and used in different ways. GDS is used to measure a borrower's ability to repay their mortgage, while TDS is used to measure a borrower's ability to repay all of their debts. Lenders use these ratios to determine a borrower's creditworthiness and ability to repay a loan, and it is important for borrowers to understand how they are calculated and what they measure.