Mortgage Glossary

Application Ratios

Loan to Value Ratio

Its the amount of loan in $, in relation to the value of the property.

LTV = (Mortgage Amount/Property Value) x 100

Lenders use this ratio to find out the maximum loan amount for a given property based on type of loan product that is offered.

i.e. Max Loan Amount = LTV x Property Value

Gross Debt Service Ratio

GDS is designed to determine if the borrower can afford the mortgage payment based on their income

GDS = ((Principal + Interest + Property Tax + Heat + 1/2 Condo Maintenance Fee) / Gross Income) x 100

GDS = 32%, which is the Industry standard

Heat is $/75/month, this is standard amount for any property

The purpose is to find out if the proposed mortgage payment is within the Lender's maximum GDS ratio

If GDS is higher than either get a lender that allows higher GDS or borrower should find ways to reduce GDS

Total Debt Service Ratio

TDS is designed to determine if the borrower can afford the mortgage payment. This calculation also includes other debts of the borrower

TDS = ((PITH + other debts) / Income) x 100

TDS = 40% which is the Industry Standard

The purpose is to pre-qualify the borrower by determining the maximum mortgage payment that borrower can afford. 

Verify that the payment qualifies by determining if the potential mortgage payment falls within the Lender's TDS ratio.

PITH = Principal, Interest, Property Tax, Property Heat

Gross income = Total Income before Tax, Standard for Heat = $75 / month.

Pre-payment Penalties.

Pre-payment is the amount that can be put towards the closed mortgage over and beyond the regular monthly payment. Usually 15%-20% pre-payment is allowed for closed mortgages. Pre-payment can be paid on monthly basis or a lump-sum.

If you pay higher or want to pay off the mortgage earlier than end of term, the lender will charge a penalty.

Penalty is of two types

1. Amount equal to 3 months interest of mortgage you owe

2. Interest Rate Differential (IRD).

The IRD is difference between interest rate of your current mortgage term and today's interest rate on the term that is remaining time left on your current term.