Debt service ratios are two percentages a lender calculates to see how much of your income is already spoken for. When a bank says your ratios are too high, it means your housing costs, or your housing costs plus all your other debt payments, came out above that lender’s limit. It rarely says anything about how reliably you pay your bills, and there are often other paths to explore.
What Are the Two Ratios, in Plain Words?
Lenders usually look at two numbers.
The first compares your housing costs to your gross income, which is your income before tax. Housing costs typically include the mortgage payment, property taxes, heat, and half of any condo fees if you have them.
The second compares those housing costs plus every other monthly debt payment to your gross income. Car loans, credit card minimums, lines of credit, and student loans all land here.
Each lender sets its own limits, and the limits can change, so I always confirm the current numbers for the lender in front of us.
What Does This Look Like With Real Life Numbers?
Say a couple near Barrie earns about $10,000 a month before tax. They have a car loan, two credit cards, and a line of credit. Their new mortgage payment looks fine on its own. Add the monthly minimums on all that other debt, and the second ratio climbs over the limit. The bank says no, even though they have never missed a payment in their lives.
The numbers here are round and made up for illustration. The pattern is real, and it shows up often.
Why Does the Bank Count My Debt Payments Instead of My Plan?
Ratios are a formula, and a formula reads the payments that exist today. If you want to consolidate those debts into one mortgage, the formula may still count the old payments on the day you apply. A plan that would lower your monthly cost does not always show up in the math. That is one of the most common reasons a file gets declined.
Why Do Two Lenders Give Different Answers on the Same File?
Because lenders choose their own limits and their own ways of counting. Some count income in a more flexible way. Some allow higher ratios when the rest of the file is strong, such as solid equity in the home. A B lender, which is a regulated lender with more flexible rules than a bank, may be able to look at your whole picture instead of only the formula. Rates and fees on those mortgages can be higher, so it helps to see the full cost before choosing.
What Can I Do to Bring My Ratios Down?
A good agent walks through these options with you, and each one has trade-offs:
Pay off or pay down a debt. Removing a car loan or a card balance takes a monthly payment out of the second ratio, which often moves the number more than people expect.
Adjust the mortgage amount. A somewhat smaller mortgage lowers the housing payment.
Add a co-borrower. A second income can change the picture, as long as everyone understands the responsibility that comes with signing.
Document your income another way. For self-employed people, how income is shown to the lender can make a real difference.
Choose a different lender type. A credit union or an alternative lender may use different rules.
Change the structure. Sometimes the type of mortgage, the amortization, or the order of steps shifts the result.
Bank said no? See all your options.
What Is the Exit Plan Back to a Bank?
Alternative lending terms are often short, such as one or two years. During that time you can lower your debt, build income history, and let the numbers settle. When the term ends, you may be able to move to a bank at regular pricing if your ratios fit by then. Map that plan before you sign, so the stop along the way has a clear destination.
When Is It Smarter to Wait?
Sometimes a few months of paying down a card will bring a file under the limit, and waiting could save real money. If a closing date is close, a renewal is coming, or a home is in the balance, there may not be time. Either choice is fair, and the right one depends on your numbers and your timeline.
Frequently asked questions
What are debt service ratios?
They are two percentages lenders use to compare your housing costs, and then your total debt payments, to your gross monthly income.
What is a good debt service ratio for a mortgage?
Limits vary by lender and by the type of mortgage, so I confirm the current ones for each file instead of quoting a single number.
Can I get a mortgage if my debt ratios are too high?
Often there are options, such as paying down debt, a different mortgage amount, a co-borrower, or a different type of lender. Approval always depends on the full file and lender approval.
Does a ratio decline hurt my credit score?
The decline itself does not. A lender may check your credit as part of an application, and an agent can explain how that works before you apply.
Do banks count the debt I plan to pay off with the new mortgage?
It depends on the lender and the file. This is one of the first things I check when a consolidation gets declined.
About the author
Lora Fenn, Mortgage Agent L1, DLC Yellow Brick Mortgages (Brokerage Licence #13854), a Barrie mortgage agent who helps Ontario homeowners and buyers find another path when the bank says no, serving Barrie, Innisfil, Orillia and all of Ontario.
Let’s talk about your file
If the bank pointed at your ratios and your real life tells a different story, let’s look at it together. Book a free 15-minute chat and tell me your goals and what the bank told you. No pressure and no judgment. If you would like to read first, grab my free guide at lorafenn.ca/free-bank-said-no-guide/.
Any figures are illustrative only and subject to lender approval (O.A.C.). Lora Fenn, Mortgage Agent L1, DLC Yellow Brick Mortgages (Brokerage Licence #13854).
