Do you have a project to buy a property? Knowing your debt-to-income ratio will help you determine if you are in a good position to borrow. It is a calculation made by financial institutions to assess your level of debt. By calculating it yourself, you will be able to determine if you are living beyond your means and if you need to change your habits to obtain the financing required for your project. Here are a few tips.
What is the debt to income ratio?
The debt-to-income ratio, or indebtedness ratio, is a percentage obtained by a calculation that compares the number of your debts to that of your gross income. It helps determine how much you owe for every dollar you earn.
The lower your debt-to-income ratio, the more reasonable your level of debt, and therefore the better your ability to repay. This indicator allows you to estimate your ability to continue paying your debts and expenses in addition to repaying a future mortgage loan.
The bank will therefore take this result into account in order to ensure that your new financing respects your repayment capacity.
How to calculate the debt-to-income ratio?
The debt-to-income ratio can be calculated using two formulas:
Gross Debt Amortization (GBS)
This indicator corresponds to the percentage of your gross income that is spent on housing costs for the coveted property. Generally, the ABD should be between 32 and 39% for a loan to be granted, but your financial institution may require a lower ratio.
Here’s how to calculate it:
1. Add the monthly occupancy costs: mortgage payment + municipal taxes + school taxes + electricity and heating costs + 50% of condominium fees (if applicable).
2. Multiply the resulting amount by 100.
3. Divide this new amount by your gross monthly income.
Total Debt Amortization (TDA)
This is the percentage of your gross monthly income that is spent on the housing costs of the coveted property, in addition to your other debts. The ATD should not exceed 44%, but a lender could also require a lower ratio. Generally, an ATD of less than 40% is considered adequate to obtain financing.
Here is how to calculate the ATD:
1. Add the monthly occupancy costs: mortgage payment + municipal taxes + school taxes + electricity and heating costs + 50% of condominium fees (if applicable).
2. Add to this amount your other monthly financial commitments: loans, generally 3% of the limit of each of your credit cards and lines of credit (whether you have a balance or not), child support and child support, and any other payment for repayment of debt.
3. Multiply the resulting amount by 100.
4. Divide this new amount by your gross monthly income.
Expenses for food and services, such as cell phone, Internet, or cable television, are not included in this calculation, since these expenses are not debt-generating. As a general rule, experts agree that this calculation offers a more global portrait of your situation since it takes into account all your current expenses.
Once your needs have been met each month, you may have discretionary income to spend on your wants. You don’t have to spend it all, and it makes financial sense to stop spending so much money on things you don’t need. It’s also helpful to create a budget that includes paying off any debt you already have.
