Total Debt Servicing Ratio (TDSR)

The total debt-servicing ratio (TDSR) is used by most banks to qualify their clients for loans and such. Most likely you wonder how they calculate it.

The first thing you need to take into account is your monthly income. Banks work with gross income. Business owners who are self employed tend to have a higher debt ratio. They can write off expenses that permanent employees cannot. Their gross, or declared, income is lower than those who aren’t self-employed.

If you benefit from multiple sources of income such as investments, interests, dividends, capital gains, rental incomes and what not, you might want to use your Notice of Assessment to demonstrate your total taxable income to a bank for getting a loan. You divide this by twelve to figure out its contribution to your monthly income. If you get paid every week, multiply it by 52 then divide by twelve to determine your monthly income. This will be more accurate than multiplying your pay stub by four (and somewhat higher as well).

Next, in order to determine a ratio, you need to calculate your debts. Financial institutions are only interested in your financial obligations: rents, mortgages, loans, lines of credit, alimonies, car leases and credit cards. You don’t count your bills—your telephone bill, cell phone, electricity or any other type of bill as part of your debts.

Your rent will be calculated even if you live with your parents and they don’t charge you. Depending where you live, the area minimum could be something like $500 or $1000 a month. If you own property, full mortgage payment plus property taxes are factored in as debt. Personal loans, car leases and alimonies are taken at their full monthly payment. When considering lines of credit and credit cards, most institutions will calculate based on 3 percent of the total balance you carry. Some banks might weigh your available limit if you have substantial credit card account, because you have the ability to make this money available to yourself any time you want.

One you complete those steps, you should know the following: your monthly income, and your spouse’s monthly income, and therefore your total household income.

You should also know your mortgage payment, you municipal and school taxes, fifty percent of your heating costs, your car leases or loan payments, three percent of your credit card balance, three percent of your available line of credit, and your total monthly payment. Add it up; is your total debt.

Once you know all that, you can calculate the TDSR simply by diving your outgo by your income. That’s all ‘ratio’ means, by the way—the relationship of one thing to another as part of a whole, or as a percentage.