In calculating matters of principal and interest relating to mortgages and other factors such as different pay periods, you may want to obtain an amortization table or mortgage interest booklet from a bank or lending institution, or simply use the Internet. Do a Google search using key words such as “Canadian mortgage payment tables” and “Canadian mortgage brokers” in your geographic area. Also, refer to the website: http://www.homebuyer.ca
Lenders use the Gross Debt Service Ratio and Total Debt Service Ratio as standard formulas for determining mortgage qualification.

Gross Debt Service Ratio (GDS Ratio)
The GDS Ratio is used to calculate the amount you can afford to spend for mortgage principal (P) and interest (I) payments. Some lenders also include property taxes (T) as part of this formula, and possibly heating costs (H), as well. All these expenses are added together. Under the GDS Ratio, payments generally should not exceed 30 per cent of your income. There is flexibility in lending criteria, though, as some lenders will go up to 32 per cent and, in some cases, 35 per cent of your income, and only include P and I rather than PIT or PITH.

Total Debt Service Ratio (TDS Ratio)
Many people have monthly financial obligations other than paying a mortgage and taxes, and lenders want to know what these are in order to determine someone’s ability to debt-service a mortgage. Using the TDS Ratio, the lender would want to know your fixed monthly debts such as credit card payments, car payments, other loans, and condominium maintenance fees. In general terms, no more than 40 per cent of your gross family income can be used when calculating the amount you can afford to pay for principal, interest, and taxes, plus your fixed monthly debts. The lender is naturally concerned about minimizing the risk that you potentially might be unable to meet your financial obligations relating to the mortgage, if the ratio of income to debt is too high.

It is important for you to roll in all your monthly expenses, some of which may not be taken into account by the lender, so that you get an accurate picture of your financial standing. These costs can include groceries, utilities, child support and insurance, for example. Make sure you do a personal cost-of-living budget. This should give you a fairly specific idea, net after tax, of what your monthly income is and what your monthly debt-servicing charges will be on top of financing a mortgage.

Factors that affect interest rates
Once the lender has obtained the above information, they apply the interest rate you will be paying to determine the maximum mortgage they will be eligible for:

The interest rate is affected by such factors as:
• The amortization period (that is, the length of time over which the mortgage is paid out in full).

• Whether the mortgage is insured by CMHC or Genworth Financial Canada (if there is a lower risk, there is a lower rate).

• The length of the term before the mortgage is due for payment or renegotiation (eg., six months, five years, or longer). Generally speaking, the longer the term, the more the risk of uncertainty about interest rates for the lender over that extended period; therefore, the rate is higher, as a protective buffer. This is not always the case, however.

• Whether the mortgage is open. If it is open, it can be paid at any time before the end of the term without penalty. If closed, it cannot be repaid or can be repaid but with a penalty (usually three months’ interest or interest differential for the balance of the term, whichever is greater). Open mortgages have higher interest     rates; closed mortgages have lower interest rates.

• Whether the interest rate is calculated and compounded annually, semi-annually or monthly. The more frequent the interest calculation and compounding, the higher the effective rate of interest you will be paying.

• The frequency of your payment schedule (weekly, bimonthly, monthly, etc.). The more frequently you pay, the faster the mortgage principle will be paid down.

• The time of year. For example, for several months after the annual RRSP deadline, lenders have lots of deposit money that they want to lend out in the form of loans and mortgages to generate income. To provide an incentive for you to borrow from them, they normally reduce interest rates, and possibly provide other incentives, such as paying of your legal fees for transferring the property or preparing and filing the mortgage documentation.

• Nature and amount of competition. Lending is a highly competitive business, and rates are negotiable.

• Whether you are using a mortgage broker. As mortgage brokers specialize in matchmaking lenders and borrowers, they know which lenders are giving discount incentives. Depending on the amount of money requested, length of mortgage term, and amortization period, you could get a discount of one to one-and-a-half per cent off the “posted” (advertised) mortgage rate Remember to comparison shop, preferably using several mortgage brokers to get the best deal for you. You could find the amount you are eligible for could vary considerably.