If your total housing costs and debt service payments are within the 40% TDS guideline, your debt has zero impact on mortgage affordability. If, on the other hand, your TDS is over 40%, you will lose a dollar of housing affordability for every dollar over that threshold that you shell out to service your debts.
Watch: MoneySense – Does debt impact your mortgage application
What a mortgage affordability calculation looks like in real numbers
Here’s an example to illustrate how credit card debt might affect a couple’s mortgage eligibility, using the GDS and TDS limits at two different interest rates. (Note that many mortgage affordability calculators automatically convert your annual income to monthly income, and/or convert your monthly housing expenses and debt payments to annual figures).
If annual household income is $100,000, maximum housing costs (including mortgage payments) should not exceed $32,000 annually ($2,667 a month, amortized over 25 years) according to the 32% GDS guideline. If we assume property taxes, heat and 50% of condo fees total $5,000 a year, that leaves up to $27,000 annually ($2,250 a month) for mortgage carrying costs:
$27,000 mortgage costs + $5,000 other housing expenses = $32,000 total housing costs
GDS = $32,000 total housing costs / $100,000 gross income = 32%
Based on their income, this couple’s mortgage payments cannot exceed $27,000 annually ($2,250 a month, amortized over 25 years), even if they have no other debt. At five-year fixed rates of 1.75% and 3%, the maximum mortgage loan would be about $545,000 and $475,000, respectively.
Now let’s look at the couple’s other debts. Say they spend $4,200 annually ($350 a month) in student loan payments, and $3,600 annually ($300 a month) in minimum credit card payments on a $10,000 balance. Their TDS ratio works out to 39.8%:
$27,000 mortgage costs + $5,000 other housing expenses + $7,800 debt service costs = $39,800 total debt load
TDS = $39,800 total debt load / $100,000 gross income = 39.8%
Because their TDS is within the 40% guideline, their mortgage borrowing power is not affected. The most the lender will approve in mortgage carrying costs is still $27,000 annually ($2,250 a month), and the mortgage loan qualification amounts remain the same.
What if, in addition to the above debts, the couple also has a car loan with payments of $6,000 annually ($500 a month)? The TDS ratio now increases to 45.8%, which exceeds the 40% guideline: