Like anyone in their field, the mortgage industry seems to have a language of its own. This oftentimes leaves outsiders scratching their head wondering what it all means. Today I am going to break down some of these acronyms and terms for you.
GDS – GDS stands for Gross Debt Servicing. What does that mean? The GDS is the percentage of your income that can go towards housing costs per month as per regulations. This percentage varies depending on your credit and down payment but is maxed out at 39%.
TDS – TDS is Total Debt Servicing. The TDS calculates all of your debt (lines of credit, vehicle payments, student loans, etc.) AND your mortgage as a percentage of your total income. Your total debt CANNOT exceed 44% of your income.
NOA – Notice of Assessment. This document comes from the government when you file taxes; it shows what your income was and how much you received/owe in taxes.
Stress Test – This was put in place by the Canadian government in 2016 to try and help Canadians manage debt. The stress test means that when purchasing a house you have to qualify at 2% higher than the actual rate. Which actually means the price of house you can afford decreased.
Pre-Qualification – A pre-qualification is not a pre-approval. A pre-qualification examines income, credit, employment, and down payment to determine what is an affordable purchase price. It does not lock in a rate rather it informs buyers what a feasible price range is.
Prime Rate – The annual interest rate set by the government. All banks and lenders base their rates off of the prime rate. It has set “evaluation” dates throughout the year where it will increase, decrease, or remain the same.
Fixed Rate – A fixed rate is a guaranteed interest rate locked in for a term ranging anywhere from 1-10 years. Whether interest rates rise or fall your payments and what portion goes toward interest and principle will remain unchanged.
Variable – A variable rate is completely dependent on the prime rate. It determines what percentage of your mortgage payment is going towards interest and what percent is going toward the principle. These amounts will fluctuate based on the prime rate adjustments.
Conventional – A conventional mortgage means that you have at least 20% down payment and do not need mortgage insurance.
High Ratio – On the flip side a high ratio mortgage is everything below that 20% down payment meaning the property must be insured and will include a premium in the mortgage.