A little bit more of calculation today. The total debt servicing ratio is a percentage used by most banks to qualify their clients. Should I use my net or gross income? Is my telephone bill part of this ratio? What about if I live at my parentsâ€™ house and I donâ€™t pay rent? Those questions and many more will be answered in this post. I will try to give you tools to calculate this ratio and explain its signification.
First thing to calculate is your monthly income. Banks are always working with gross income. This is why business owners and self employed individuals have, in general, a higher debt ratio. Since they have the ability to write-off several expenses than permanent employees canâ€™t, their gross (declared) income is lower. If you benefit from different sources of income (investments, interests, dividends, capital gains, rental incomes, etc), you might want to use your Notice of Assessment showing your total taxable income and divided it by twelve in order to have a monthly income. If you only have a regular pay every two weeks, make sure to multiply this income by 26 (you will receive 26 pay cheques during the year) and then divide it by 12. That will give your real monthly income that will be slightly higher (and more accurate!) than multiply your pay stub by 2.
Now that you have calculated your gross monthly income, itâ€™s time to get your debts in the equation. Financial institutions only consider your financial obligation i.e. rents, mortgages, loans, lines of credit, alimonies, car leases and credit cards. Therefore, you donâ€™t have to count your telephone, cell phone, electricity bill and all type of insurance payments. However, banks will also consider half of your condo fees and your heating cost. There are also some considerations in regards to the calculation of your debts.
A minimum rent will be calculated even if you live with your parents or if you split your rent with other people. Depending on the area where you live in, the minimum used might be $500 to $1000 a month. If you own a property, full mortgage payment along with municipal and school taxes will be considered. For personal loans, car leases and alimonies, the full monthly payment will be taken. In regards to lines of credit and credit cards, most institutions will use 3% of the balance. However, some banks might consider your available limit if you have substantial credit account. This money is always available at any time.
After completing those steps, you should have something like this:
Your monthly income: $4,250
Spouseâ€™s monthly income: $4,250
Total income: $8,500
Mortgage pmt: $1,350
Municipal and school taxes: $350
50% of heating costs: $100
2 Car leases $1,000
Credit cards ($5,400 * 3%) $162
Line of credit ($7,200 * 3%) $216
Total monthly payment: $3,178
TDSR ($8,500 / $3,178): 37,38%
This example shows a debt ratio that is reasonable (below 40%). However, this couple might not qualify for a big loan as they are near the maximum TDSR considered by banks. Some banks are specialized in high debt ratio landing and will accept a higher TDSR in exchange of a higher rate or collateral.
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