Also the total costs of your mortgage and all other housing costs, plus all debt service payments (including minimum credit card payments, car payments, and student loan payments) cannot exceed 40% of your gross (before tax) income, but some lenders can go as high as 44%. This is called your total debt service ratio (TDS).

If your total housing costs and repayments fall within the 40% TDS guideline, your debt will not affect the affordability of your mortgage. In contrast, if your TDS is over 40%, you lose a dollar of affordability for every dollar above that threshold you spend paying off your debt.

Watch: MoneySense – Does Debt Affect Your Mortgage Application?

What a mortgage affordability calculation looks like in real numbers

Here’s an example to illustrate how credit card debt can affect a couple’s eligibility for a mortgage, using the GDS and TDS limits at two different interest rates. (Note that many mortgage payment calculators automatically convert your annual income into monthly income and/or convert your monthly living expenses and debt payments into annual figures).

If the annual household income is $100,000, the maximum housing costs (including mortgage payments) should not exceed $32,000 per year ($2,667 per month, amortized over 25 years) according to the 32% GDS guideline. If we consider property taxes, heat, and 50% of condo costs totaling $5,000 per year, that leaves $27,000 ($2,250 per month) annually for mortgage payments:

$27,000 mortgage costs + $5,000 other housing costs = $32,000 total housing costs
GDS = $32,000 Total Housing Cost / $100,000 Gross Income = 32%

Based on their income, this couple’s mortgage payments can’t exceed $27,000 per year ($2,250 per month, amortized over 25 years), even if they have no other debts. At a five-year fixed rate of 1.75% and 3%, the maximum mortgage loan would be approximately $545,000 and $475,000, respectively.

Now let’s look at the couple’s other debts. Suppose they spend $4,200 annually ($350 per month) on student loan payments and $3,600 per year ($300 per month) on minimum credit card payments on a $10,000 balance. Their TDS ratio comes out at 39.8%:

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