Total Debt Service Ratio 2009
With our taxes now complete, I have the opportunity to figure out exactly what our Total Debt Service Ratio was for 2009. First I want to define GDS (Gross Debt Service Ratio) and TDS (Total Debt Service Ratio).
The GDS is the maximum percentage of your gross income that is allocated to paying the costs of carrying your home. This ratio includes your principal and interest mortgage payment, property taxes, heating and/or condo fees. To qualify your monthly carrying costs cannot exceed 32% of your gross monthly income.
The TDS is the maximum percentage of your gross income that can be used to pay your GDS plus all other debts. This ratio includes everything from the GDS as well as any other loans, credit cards or lines of credit. To qualify it cannot exceed 40% of your gross monthly income.
I want to mention that these are guidelines only and those with good history of managing their credit are allowed to go as high at 44% TDS without considering GDS at all. Yes, if people are not carrying any other debt and have no other monthly obligations their housing costs can eat up 44% of their gross income. This is somewhat scary as someone wanting a $400K mortgage could qualify making just under $60K per year. If you want to read further click here for the CMHC Quick Reference Guide.
I take the attitude that if CMHC uses 44% at the maximum TDS then that is what we should attempt to achieve. For 2009 our TDS was 41%. Not bad, but why were we unable to achieve 44%? $5523 represents that 3% of our income that we did not use for housing costs. This means that we were short approximately $460 per month for mortgage payments. Could we have found that money? Of course we could have. Cut gym memberships, cut donations, cut eating out, cut new computer, cut new theater seating, cut vacations and take advantage of public transit more often. Making up this $460 per month would be very easy for us.
Although achievable, I don’t see cutting those “luxuries” as an option. We are making great progress paying down the mortgage and as long as we are able to stay on track we are not going to change our lifestyle.
I want to note that we are at 41% by choice. Although with our regular mortgage payment and prepayment averaged just over $5,900 per month we are not locked into this payment and we have no other monthly obligations. There would be considerable stress if we were locked into those payments.
When considering your mortgage options ensure that you are not over extending yourself.
March 2010 Mortgage Reduction Report
We have just made our mortgage prepayment for March. In February we were short $1,934 for our prepayment. This month we were able to prepay $7,000 with catches us up and give us a few hundred dollars towards April’s prepayment which will be needed. We have reached a couple of milestones with this month’s prepayment.
We passed the $100,000 mark for mortgage payments this month. We have been making payments for 20 months making our average monthly payment $5331.34. The other accomplishment was having paid off 25% of our mortgage. We have actually paid off 26% this month. I am quite happy with both accomplishments and hope we are fortunate enough to be able to keep it up.
I will have have a hefty tax bill on April 30th and we may be taking a tropical vacation as well. We will have no issues paying for these but our mortgage prepayment may not be the full $4,712 for the month. I am hoping I can pick up some business or some overtime at work to help with the shortfall.
Our projected interest savings are now $270,774.30
New Mortgage Rules Mean Less House or Less Choice for Mortgage Terms
Canada Mortgage and Housing Corporation has announced that as of April 19th home buyers will have to qualify for their mortgages at the bank’s posted 5 year rates if you are putting less than 20% down and are taking a variable rate mortgage or a term of less than 5 years. This is being done to ensure that people do not over extend themselves and end up losing their home in the future because they are forced to renew their mortgage at a higher rate. What does this mean to home buyers? You will now qualify for less of a mortgage than before or you are stuck with a five year mortgage term.
For example if the maximum amount you qualify for with a 3 year rate of 3.49% is $350K you will now only qualify for $273,674 because you have to qualify at the 5 year posted rate of 5.39%. Your interest rate will still be 3.49% but you qualify for over 20% less of a mortgage because of the new rules.
How will this effect you? What do you think it will do to real estate prices in general?
Mortgage Payment Error
Banking errors happen and they are much easier to accept when they are corrected quickly and at no cost to the customer.
Earlier this month I submitted an online form to my mortgage lender with a request to make a prepayment of $500. It is pretty easy and I have never had any problems in the past. A couple of days later I was woken from a nap my my better half because our joint account was in over draft because the mortgage lender had taken $12,500.
After transferring funds from our line of credit I tried to figure out how that could happen. I was 99.9% confident that I submitted the right amount, but had a little self doubt because I could not see how the bank could confuse $12,500 from $500. On the other side of that doubt was the fact that I knew we had enough money to cover a $500 mortgage prepayment but an amount of $12,500 for a mortgage prepayment would cause all kinds of havoc.
This happened over the weekend so nothing could be done and the end result was a NSF change for $40 as the bank had reversed the mortgage prepayment.
I contacted my mortgage lender and explained what had happened. They were able to see the $12,500 being withdrawn from and then put back into our account. The were not able to explain how a $500 mortgage prepayment could turn into a $12,500 mortgage prepayment. They asked for a bank statement to refund the $40 NSF fee.
I faxed in the bank statement and the $40 was back in our account within 2 days. I followed up with a phone call to see how that may have happened and they didn’t know. I was advised to phone in to make prepayments rather than completing the online form.
At the end of the day their mistake cost me about 20 minutes of my time to correct, but I was very happy with how quickly it was corrected.
Debt & Mortgages
I have been reading different blogs this week about paying down debts and mortgages to see how others deal with debt. I would like to share the following with you.
Michael James on Money has a conflicting view on debt with our government. I have to agree with him.
Frugal Trader at Million Dollar Journey talks about the changes to the mortgage rules for Canadians.
Blunt Money talks about paying off debt. She is blunt and basic!
Read about Mindsets to Break Free from Debt at I’ve Paid for this Twice Already…
Frugal Dad tells you how to be a Debt Killing Machine!
Enjoy the read….