Percent of Income for Rent and Other Expenses

Hi Folks!

As many people are taking the advice from my April 2020 blog post and reviewing their budget, a new question has often come up: How much of my income should be designated to rent and other household expenses?

The answer is part of a calculation called TDSR (Total Debt Service Ratio). This is the percentage of your gros monthly income used for household expenses and minimum debt payments.

When you apply for a mortgage as well as some other loan types, banks and other lenders calculate your TDSR as a way to establish how much you can afford. Overall, the ideal TDSR, from a lender`s perspective, is between 30% and 45%. From a borrower’s perspective, the ideal TDSR is zero, but that only happens when there are no expenses. Here`s how to calculate your TDSR using an example of $6700/month gros income: 

EXPENSE TYPE$TDSR
Rent or mortgage + property tax125018.7% so far
Utilities 5019.4% so far
Cell 6020.3% so far
Car payment 33025.2% so far
Credit card(s) 22028.5% so far
Line(s) of credit 10030%
TOTAL$201030% TDSR
Add rent/mortgage, utilities, cell, car payment and 3% of all debt balances then divide the result into your gros monthly income. The end result is your TDSR.

One of the most important ways TDSR is applied is when you apply for a mortgage in Canada with anything less than 20% down payment, the mortgage must be insured (by CMHC, Genworth or Canada Guarantee) and each insurer allows a maximum TDSR in order to qualify and they sometimes change the rule to reflect how our economy is operating and to try to help keep borrowers safe.

I hope this demonstrates how to budget for changes in your life or just fine tune your finances.

Besh wishes,

DGB

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