These days, debt is something that follows most Canadians around for most of our lives. We’re comfortable with debt (maybe too comfortable); we know how to get credit and we definitely know how to use it. But what bearing does this debt have on our ability to get a mortgage, and what does that mean for the future of the housing market?
 
The amount of money that Canadians owe compared with how much they earn hit another record high last year, according to Statistics Canada.
 
The amount of household credit market debt rose to 167.3 per cent of adjusted household disposable income in the fourth quarter, up from 166.8 per cent in the third quarter, which means that there was $1.67 in credit market debt for every dollar of adjusted household disposable income.
 
“After slowing to a stable year-over-year pace by late-2013, growth in this debt ratio has since accelerated again alongside torrid gains in the Vancouver and Toronto housing markets,” said Robert Kavcic, BMO Capital Markets senior economist.
 
Fuelled by mortgages and low interest rates, household debt has been climbing steadily in recent years. Policy-makers have raised concerns about household debt and see it as a key risk to the economy.
 
Total household credit market debt, which includes consumer credit, mortgages and non-mortgage loans, totalled nearly $2.029 trillion in the final quarter of last year. Mortgage debt alone accounted for 65.5 per cent of the total.
 
Mortgages accounted for $18.9 billion in the three-month period, up $1.2 billion from the third quarter, while consumer credit and non-mortgage loans totalled $9.5 billion, up $8.5 billion from the previous quarter.
 
It’s clear that even though consumer debt is rising, consumers are still lining up to get mortgages – and lenders are still doing plenty of mortgage business, although regulations and qualification requirements continue to tighten.
 
So given the increasing amount of debt that Canadians have, how does this impact your mortgage application?

GDS and TDS
 
Lenders use a kind of formula to figure out your debt-to-income ratio, and it is quite simply, the amount of debt you have relative to your total income. This gives them a baseline to understand how much you can afford for your mortgage payments, and is divided into two types: the gross debt service ratio (GDS) and the total debt service ratio (TDS).
 
Your GDS ratio is your projected – not current – monthly housing-related expenses divided by your gross monthly income. Housing expenses include mortgage payment, heating costs, property taxes, and half of your condo fees (if applicable).

Your TDS ratio is your housing-related expenses plus your total monthly debts divided by your gross monthly income. This debt includes credit card payments, car payments, other loans, and other recurring debts such as alimony and child support. From a borrower’s perspective, the TDS is more important since it provides a clearer picture of how much money you’ll have left to pay your mortgage after you pay all of your debts. From a lender’s perspective, however, both of these categories are equally important when being qualified for a mortgage; the GDS demonstrates whether or not you can afford the property that you’re buying, while the TDS demonstrates whether or not you can handle all of your debt responsibly.
 
So looking at it in practice, if your monthly costs are:
 
 
Mortgage payment: $1800
Property tax: $208
Heating costs: $100
½ condo fees: 0
Total housing costs: $2108
 
Total housing costs divided by gross monthly income:
 
$2108 ÷ $4500 = .468
GDS Ratio: 47 per cent
 
 
Monthly mortgage payment: $1800
Property tax: $208
Heating costs: $100
½ condo fees: 0
Total housing costs: $2108
Recurring debt per month: $250
 
Total housing costs + monthly debt divided by gross monthly income:
$2358 ÷ $4500 = .524
TDS Ratio: 52 per cent
 
 
When it comes to qualifying for a mortgage, the standard qualifying ratios for excellent borrowers are a GDS of 39 per cent and a TDS of 44 per cent, according to the Canadian Bankers Association. In the instance above, the borrower’s finances clearly fall outside of the 39 per cent limit for GDS ratio and 44 per cent limit for TDS ratios. According to most lenders, the borrower wouldn’t be able to afford a monthly mortgage payment of $1800.

Bending the rules
 
The kicker, however, is that lenders are sometimes able to massage those ratios a bit. Banks generally don’t bend the rules for clients more than a percentage point, and one of the reasons why banks like top-notch, low-risk borrowers is because they don’t have to do so; the borrowers can qualify for mortgages and low interest rates without a problem. Also, nothing is reviewed in a vacuum. Maybe your TDS tips the scales away from you but you have excellent credit and your lender is able to see stellar credit history.
 
So how much debt is too much debt? By rule of thumb, you want to want to see your debt well under 44 per cent, closer to 42 per cent. But if it’s not, know that your debt may not be a deal breaker for getting a mortgage.
 
Having a knowledgeable mortgage broker working for you can make a big difference here. They won’t be able to change your GDS and TDS ratios, but maybe they’ll take your application to a lender who sees that you’re a few percentage points off but does a lot of business with your broker and knows that (s)he only submits deals that make sense – even if the numbers are a bit off on paper. That’s not always the case, of course, but lender and underwriter discretion can make a difference, especially when it comes to cases of self-employment.

Debt and the housing market
 
It stands to reason that as home prices increase, the amount of mortgage debt increases as well. Interest rates have been low for years, meaning that borrowing money has been very cheap for Canadians. The concern, however, is that when interest rates rise, interest rates on debts will rise as well – mortgages and non-mortgage debt alike – making previous debt qualification levels unsatisfactory.
 
The national average price for a home sold in February was $519,521, up 3.5 per cent from a year ago, boosted by Greater Vancouver and Greater Toronto.
 
“As home prices accelerate in some parts of Canada, particularly in Ontario, households have been getting a nice boost to their net wealth,” TD Bank economist Diana Petramala wrote in a note. “Debt growth has accelerated somewhat, but it is not growing at the double-digit pace that would typically be considered dangerous.”
 
The latest reading on household debt from Statistics Canada came as consumer credit company Equifax said in its national consumer credit trends report that total consumer debt held by Canadians, including mortgages, in the fourth quarter increased six per cent compared with a year ago to $1.718 trillion.
 
When it comes to debt, mortgages, and home prices, it may feel as if Canada is reaching a tipping point. But Equifax said in its latest national consumer credit trends report that total consumer debt held by Canadians, including mortgages, in the fourth quarter increased six per cent compared with a year ago to $1.718 trillion.
 
The Equifax report also noted that while 46 per cent of consumers were decreasing their debt, 37 per cent were borrowing more.
 
 

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