Similarly, the total cost of your mortgage and all other housing expenses, plus all debt service payments (including credit card minimum payments, car payments and student loan payments) should be no greater than 40% of your gross (pre-tax) income, but some lenders may go up to 44%. This is called your total debt service ratio (TDS).
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.
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.
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 5-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%