February 12, 2013
Introducing the New Total Debt Service and Savings Ratio
With the ultra-low interest rates that are currently available, it’s unfortunate but not surprising that Canadians are continuing to pile on debt at record levels. The Bank of Canada has left the overnight lending rate at 1.00 per cent for the 28th consecutive month, which helps keep lender’s prime lending rates low, and today many people can get a 5-year fixed mortgage rate for as little as 2.84 per cent.
In Q3 2012, the debt-to-income ratio for the average Canadian reached a record 164.6 per cent. And with consumers taking on so much debt, it’s important to consider just how much Canadians are saving. According to a recent CIBC poll, it’s not much – the top financial priority for Canadians is paying down debt, while saving for retirement is a distant third.
To help future homeowners better understand how they can both take on a mortgage, and continue to save while paying it down, personal finance writer Rob Carrick has come up with a new calculation: the Total Debt Service and Savings Ratio. Designed with first-time buyers in mind, this calculation is easy to do at home and can help give Canadians a “big picture” of their personal finances.
You probably know that lenders look at the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios, when qualifying Canadians for mortgages. While both calculations help lenders feel confident that the buyer will be able to make all of their monthly mortgage payments and carrying costs, what they don’t do is help the buyer budget for additional monthly savings.
As the extra “S” for “Savings” states, that’s where the TDSS ratio calculation comes into play. The TDSS adds up all of a buyer’s monthly housing expenses and debt repayments, as well as 10 per cent of their take home pay for savings, and divides the sum by their gross monthly income. Ideally, the TDSS would be less than 40 per cent and no more than 50 per cent, as 50 per cent would leave a buyer fairly strapped for cash.
Calculating the TDSS
The TDSS ratio takes the GDS and TDS ratios one step further. Start by adding up a potential buyer’s regular monthly expenses: their mortgage payment, property taxes and heating costs. Then add any debt repayments they make on a monthly basis, as well as 10 per cent of their take home pay. Finally, divide the sum of those numbers by the buyer’s gross monthly income and – ta da! – the answer is their TDSS. Let’s look at an example:
$1,500 mortgage + $200 property taxes + $150 heating + $200 debt + ($4,000 x 10%)
In this example, the buyer’s TDSS is 41 per cent. Because this example is below 50 per cent, the buyer should be in good shape to both pay down their debts and save for their future.
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