# Gail Vaz-Oxlade Debt Ratios Article



## Koala (Jan 27, 2012)

Some of the facts in this article:

http://www.moneysense.ca/2012/07/03/outdated-mortgage-formulae-mean-trouble/

seem off to me. Does anyone know if some of the information is incorrect?

I do agree that using net income instead of gross would be more logical.


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## Square Root (Jan 30, 2010)

Looks about right to me. Banks use gross income because it's simpler and easier to verify. Obviously net income would be better but then there would be a lot of adjustments required to bring all the other amounts to an after tax basis. Banks also sometimes impute a higher interest rate on the mortgage in case rates go up faster than income in the future. In the end it really is the responsibility of the borrower to decide if he can afford the mortgage. Banks are in business to make money not manage their customer's financial affairs.


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## Koala (Jan 27, 2012)

Do banks usually only give a GDSR of 32%? If so, why was there the need to set the max at 39% for insured mortgages?
I was surprised that it says the available credit is used to calculate the TDSR. Many people have fairly high limits on credit cards that they barely use, and the limit for a line of credit is usually also fairly high.


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## HaroldCrump (Jun 10, 2009)

Square Root said:


> Looks about right to me. Banks use gross income because it's simpler and easier to verify.


Using the tax returns from last 5 years is a quick and easy way to estimate the net income going forward.
Since mortgage payments come out of after-tax income (unlike the US), I see no reason to use gross income.
Tax rates vary a lot from province to province, so that's another reason why net income should be used.

Using net income also demonstrates to the mathematically challenged : _see, this is how little you make after taxes, therefore, this is the max. mortgage you can afford_.

Using gross income is like how clothes manufacturers play with sizes to make people feel thinner.

P.S. I do agree with your last statement that it is the responsibility of the borrower to decide if they can afford the mortgage amount. As long as we keep the tax payers out of it.


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## stephenheath (Apr 3, 2009)

But does it really matter since the whole % of income is just a guideline? All that would happen is they would take that 32% figure, calculate average tax rates for the provinces, and come up with a new figure like 40% net... which is still just a bank's estimate for what they are comfortable with. For borrowers they should be looking at their budget and "what if" forecasts to decide what they are comfortable with, not going with a bank ratio.


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## HaroldCrump (Jun 10, 2009)

stephenheath said:


> But does it really matter since the whole % of income is just a guideline? All that would happen is they would take that 32% figure, calculate average tax rates for the provinces, and come up with a new figure like 40% net


No, I meant use the net income number on their tax return as the basis, not estimate based on the provincial tax rate.
In the end, everyone pays mortgage out of their net income.
Nobody, nothing, gets paid out of gross income except the govt.
So why not use a more realistic number rather than a number you know for sure to be grossly incorrect.

Sure, there is no ultimate magic number that can predict whether a borrower can pay the mortgage successfully for the next 30 years.
But the more granular you can get, the better.
It avoids the so-called "house rich, cash poor" situation.
And if there is a RE correction/crash, the situation becomes "house poor, cash poor".


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## Mall Guy (Sep 14, 2011)

It's up to the banks backshop to do the underwriting of the application, since everyone you would ever speak to about a mortgage is getting paid a commission. The underwriters are only as good as the banks policies on wanting money out the door (or maybe not, as the back shop may not be all that well paid). The ratios have been around for a long time, how they are enforced is what comes and goes . . . just look south of the boarder. As well, the guidelines may call for it to be on total credit available, but it's been a few mortgages ago since I've seen that in action.


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## Potato (Apr 3, 2009)

I think using gross makes sense: yes the mortgage is paid out of net income, but as you make more you can afford to spend more on housing if you so choose because your other basic needs are covered. So a fixed gross income percentage works out to a gently increasing percentage of net income (as taxes rise with income).


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## themortgageguy (Jun 28, 2012)

Koala said:


> Do banks usually only give a GDSR of 32%? If so, why was there the need to set the max at 39% for insured mortgages?
> I was surprised that it says the available credit is used to calculate the TDSR. Many people have fairly high limits on credit cards that they barely use, and the limit for a line of credit is usually also fairly high.


Your credit score effects the ratio levels that are allowed for qualification. The 39% was mandated for insured mortgages in the last round of mortgage rules for insured mortgages. Previously if your credit score was 680 and up, the TDS and GDS were 44%. Now the GDS has been lowered to 39%. For those with credit scores below 680 there has been no change.


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## themortgageguy (Jun 28, 2012)

The banks know everyone is expected to pay tax and they certainly take other adjustments into consideration when underwriting a mortgage. Gross income is used because its easy and usually verifiable. Getting to net income can get messy with all the various deductions available to individuals from gross income and can cause large fluctuations year to year. There are also other "standards" that are questionable i.e. standard inclusion of $100 a month for heat (who pays that?). 

A persons finances could also be stretched by amounts not reflected anywhere i.e. monthly cash given to support a sick family member for instance or cash to kids at school etc.. 

If someone is financially stretched it will be reflected in in their TDS ratio as well by inclusion of credit cards, personal loans etc all reflected in their credit bureau. And at 44% as the maximum ratio, that still leaves 56% of gross income available. 

The taxes owing is covered off by a lender asking for the most recent CRA NOA to ensure your taxes are paid.

Lenders have been doing this a long time and usually know what they are doing and what to look for. Mortgages are underwritten with the information available at the time of the application and the future could always hold risks. Bearing some risk is what the interest is meant to cover off.


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## Financial Cents (Jul 22, 2010)

I've never liked these ratios. My main issue is they use gross, not net.

http://www.myownadvisor.ca/2012/05/my-struggle-with-gdsr-and-tdsr/


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