What is the required debt service ratio?

Debt service ratio is an important qualifying metric for mortgages indicating what percentage of income goes towards housing and other debt payments. It remains a mystery to me what this number is in Canada. On one part of their website CMHC states that gross debt service ratio, which represents mortgage payments, heating, taxes and a portion of condo fees should not exceed 32% of income. It also states that total debt service ratio, which includes all other debt servicing such as visa bills and vehicle payments should not exceed 40% of income.

This is a way of estimating the maximum home-related expenses you can afford to pay each month. To qualify for CMHC insurance, the total should not exceed 32% of your gross monthly household income.

This enables you to estimate the maximum debt load you can carry each month. It should not exceed 40% of your gross monthly household income.

The choice of words of should not as opposed to must not is interesting. Following the link I noticed there is a table estimating how much one can afford with different incomes and down payments. It assumes an interest rate of 8% and a GDS ratio of 32% which seem to be the stuff of ancient history...



The details of the loan products on the CMHC website show a maximum total debt service ratio of 44% with the gross ratio not considered. This product sheet was updated March 27, 2009. Note the use of words such as "guidelines" and "recommended" as opposed to "rules" and "limits".



Looking back at this article when 40-year mortgages were scrapped there is a quote regarding debt service ratio rules.

Effective Oct. 15, the maximum mortgage amortization period for new mortgages will be reduced from 40 years to 35 years. All mortgages must have at least a five per cent down payment. Homebuyers must have a minimum credit score of 620 and a maximum of 45 per cent total debt service ratio (the amount of gross income that is spent on servicing debt and housing-related expenses such as heat or condo fees).

They were using more before this?!

Some online mortgage calculators appear to use 32%, but there is anecdotal evidence that higher ratios are being used. This is troubling because the combination of historically low interest rates (including 5-year fixed rates under 4%), longer amortization and high debt service ratios will certainly lead to increased foreclosures going forward.

In addition to the recent mortgage rule changes CMHC should clearly and consistently identify a maximum gross debt service ratio and this should not exceed 32%.