How to Manage TDSR and GDSR

Having gone through the last two articles to understand what TDSR and GDSR are, we are now in a position to dig into exactly how it is that lenders look at these two metrics, and some simple strategies that borrowers can use to improve their applications through these venues.

When looking at TDSR and GDSR, lenders will first want to ensure that the values fall within an acceptable range. In general, financial institutions will want to see a TDSR of between 35-45%, and a GDSR of approximately 20-35%.

The rationale behind these amounts lies mainly in the way in which a financial institution does not want to place their client into a position where they are under financial stress. Contrary to popular belief, the bank does not actually want to repossess any of a borrower’s assets, and would much rather that the client repays the loan and interest in a reasonable amount of time.

As such, they try to ensure that they are only taking on business that is conservative in nature, and involves unstressed funds. Alternatively, the reasoning behind the GDSR metric is twofold. Firstly, the lender wants to ensure that the collateral itself is leveraged less than the borrower himself, because the individual will have a greater amount of claimable assets than the home itself.

It therefore stands to reason that the value of the collateralized loan will be less than the amount of debt that is unsecured, but applicable to the general assets of the individual borrower in the event of default. Essentially, this means that the lender would like to see that the borrower is not over-extending their current income, and is not over-leveraged against an individual asset.

When addressing TDSR and GDSR as a borrower, we have a couple of options available to ensure that an unfavorable metric does not immediately disqualify our application. The first way to circumvent a bad TDSR metric is to find a co-signer with a more favorable metric to contribute to the application.

The method behind this strategy revolves around the way in which a co-signature will implicate the co-signing party as a borrower. If the combined signers have a favorable TDSR or GDSR rate, they can be approved for a loan where a single application might not be able to. This also means that larger loan amounts can be granted, because of the greater capacity of both individuals to repay.

An alternative way to plan for TDSR and GDSR structuring in a loan application involves planning out how it is that balances on loans interact. For example, if a borrower has a high TDSR and a low GDSR, they are in a position to consolidate their debt against the home asset, and therefore reduce their interest payments. By reducing the interest requirements of the loan through securitization, the borrower would be effectively improving their TDSR as well, because it reduces the required payments of the loan, and therefore the living obligation aspect of the calculation.

When looking at how it is that these two strategies differ, it is important to recognize how it is that individual applications will each be different. By taking into account the nuance of their individual situation, a borrower is able to leverage the strengths of their existing financial position, and work with their personal banker to reach saving, purchasing, and borrowing goals. As such, one of the best questions to ask while discussing a loan application is: “Do you see any ways in which I can improve this application before we begin discussing approval and interest rate?”