Do you know what percentage of your pay cheque goes towards household expenses and consumer debts? Your total debt servicing ratio (TDS) is a calculation that financial lenders use as a rule of thumb to give a preliminary assessment of whether or not a borrower can handle their existing debt or additional debt. More specifically, your TDS shows the percentage of gross income (income before tax deductions) that is being spent on household expenses (mortgage payment, property tax, heat) and consumer debts (use the minimum payment required). In today’s economy lenders will only consider borrowers who do not exceed a TDS of 44% (in some cases lenders will allow a maximum of 50% TDS).
To calculate your TDS:
TDS = Annual Mortgage Payments + Property Taxes + Other Debt Payments
Gross Family Income
What can you do if your TDS exceeds the industry guideline? If you are looking to refinance the easiest way to lower your debt servicing ratio is to consolidate your debt into your mortgage. Not only does this lower the interest rate on the debt (the average credit card is at 19.99%) but it also frees up money that was going towards interest payments that can now be utilized in another manner (ie: paying off the principle or saving for retirement).