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What’s your borrowing capacity?

September 28 2016 by Denis Doucet
What you'll learn
  • Understanding GDS and TDS ratios 
  • Our online tool to simply your calculations 
  • Should we maximize our borrowing capacity?

As we begin our browsing of properties, we are confronted with the question “How much can I afford?”.  The question of individual borrowing capacity merits attention and, thankfully, there are simple ways to estimate it. A few calculations will give you a quick and accurate approximation.

First, it’s necessary to understand the concept of debt ratios. Most of us ignore their existence but these ratios actually play a key role in determining whether or not you will obtain a mortgage approval.

Two keys ratios : GDS and TDS

When the time comes to assess  your borrowing capacity, the first indicator used by financial institutions is the gross debt service or GDS. This ratio takes your annual housing expenses (or renting expense) by comparing them to your gross annual revenue. For an insured loan, this ratio must fall in between 32% and 39% depending on the lender. 

The second indicator is total debt service or TDS. As its name suggests, the TDS is obtained by adding your non-housing related debts to your GDS to give the lender and idea as to whether or not you will be able to reimburse both your mortgage and your other debts. Government norms require that the TDS ratio doesn’t exceed 44% in any case whereas some lenders demand a lower ratio for mortgage approval. 

It’s important to take these ratios into account when you being your search for your next home. There is no point in coveting properties that you won’t have the capacity to obtain financing for, right?

Look at our examples of debt-equity ratio 

A simple tool:  Our web calculator

In order to simply your decisions and buying process, we created a user friendly tool available to you. You simply need to input a few financial information in our calculator to know what price range you can afford for your next home purchase. 

Access to our calculator

How to use this calculator?

First input your gross revenue, down payment and the projected interest rate of your mortgage (if you are co-buyers make sure to indicate your combined revenues). The next step is to indicate your money outflow. In the field “monthly debt payments” include all your recurring financial obligations (car payments, monthly appliance payments, insurance, etc.). In the field “monthly expenses” indicate your Hydro-Quebec payments (also add condo fees if these apply to you). 

Pushing to your maximum borrowing capacity?

Don’t forget that the purchase of a property is also accompanied by various fees like the welcome tax and notary fees. Added to these expenses is the municipal and school tax adjustments. 

We therefore do not recommend you to maximize your borrowing capacity since it could leave you empty handed if an unforeseen circumstance where to happen. 

Key takeaways
  • Use our web calculator to estimate your capacity to pay.
  • Don’t forget any debt when calculating.
  • Add a section for ongoing expenses in your budget.