With all the rule changes sweeping the mortgage industry, an important message seems to be getting lost – the one that shouts at you like your grade 10 gym teacher – Manage your consumer debt!!!
Yes, you’ll need to qualify at 4.64%- the stress test rate – for that new mortgage and ensure that your debt servicing is below 39% ( GDS) and 44% (TDS), but what does that really mean?
Well, GDS or gross debt servicing, is the calculation of how much of your income will go towards paying your shelter costs (mortgage, taxes, heat and condo fees mostly) compared to your gross income. ( My friend and co-worker Ralph E. once said – “I know its gross, you don’t have to keep pointing it out .” ) You have little control over GDS beyond making sure you’re buying something affordable.
TDS or total debt servicing is the ratio of how much you spend paying your debts versus your gross income ( that word again!). This includes the mortgage payment but it also includes loans, lines of credit and credit cards and while your debt may seem manageable, let me show you just one example of how it might not be.
Say, for example you make $65000 a year, have a steady job, worked for a number of years and saved $70000 ( with a little help from the bank of mum and dad ) towards your first place and no other debt.
By all accounts, you should- and do- qualify for a $330000 mortgage, but let’s add just one bit of consumer debt to the mix and see what happens.
When you got out of school, you did what most of us do; you ran up some credit card debt. Since then you’ve managed your money well and you’re left with one credit card as your one piece of consumer debt. It has a $10000 balance and more often than not, you pay more than the minimum payment of $100 but you do use the card regularly, so the balance never seems to come down.
The problem is, if you continue to make the minimum payment, it will take over 100 years to pay off the balance. What’s worse is; when we’re calculating the debt servicing for your new mortgage, we don’t use 1% ( the $100 minimum payment), we use 3% ( $300, what minimum payments used to be ).
Using the 3% payment calculation method raises your TDS by 5.5% and guess what? That’s correct, you no longer qualify for a $330000 mortgage. In markets where property values are going up, its critical to maximize the amount you can borrow, so this is not good news.
If you’re reading this and you’ve been thinking about buying a new home or your first home, it’s easy to feel a little crestfallen and think it will never happen. I urge you – DO NOT feel that way – your parents and everyone you know who owns has faced similar challenges.
I said that you have little control over GDS but the good news is that you do have control over your total debt servicing – it’s just a matter of carefully managing your consumer debt and being aware of what you are spending your money on. The first thing to recognize is that its your money and you need to take control of who you give it to. There is some great information on managing your debt here.
Even if your plans include a home purchase a few years off, now is the time to get the help you need from a Mortgage Professional – Just give me a call!