Similar to the Total Debt Service Ratio (TDSR), the Gross Debt Service Ratio (GDSR) is a metric that is commonly used by lenders in conjunction with a credit score. As the name suggests, GDSR acts as a metric for specifically representing the amount of an individual’s income that is being used to service home-related debt. When paired with TDSR, GDSR allows a lender to evaluate the current debt burden of a borrower, and how it is that home-equity contributes to this obligation.
As with TDSR, the first input to calculate is the total amount of obligations that an individual is currently attributing to essential costs. However, it is important to recognize how it is that GDSR only takes into account mortgage and home-equity related expenses. This means that GDSR will only involve the total costs of mortgage interest, installment payments, and home equity lines of credit.
Interestingly enough, insurance payments for the home itself are not included in this calculation, but insurance of the loan itself will be. The end result is an amount that will be smaller than the total living obligations calculated for TDSR, but more meaningful in the way that they are all related to the home itself. From there, we can calculate the total gross income of the borrower.
Like TDSR, GDSR is calculated by dividing the obligation amount by the income amount, and multiplying the quotient by 100 to create a percentage. This amount will be smaller than the TDSR, and demonstrates the proportion of the borrower’s income that is specifically being applied towards obligations that are secured against the home.
While it might seem as a somewhat limiting metric, GDSR provides key insights into the borrowing capacity of a bank customer. Specifically, by understanding how much of a borrower’s current obligation-load is being applied towards a given property, a lender can evaluate how to best proceed with an incremental loan.
For example, if GDSR represents an amount that is at about 30%, the lender might feel as though a personal loan would be more favorable, so as to diversify the loan portfolio. Alternatively, a GDSR below 10% might represent a borrower’s capacity to take on additional secured debt against their properties, which would afford them a better interest rate.
When looking at GDSR as a personal financial metric, many people might find it difficult to understand why it is that we’d want a metric that explicitly singles out home-secured debt when TDSR provides a more holistic picture of the borrower’s financial picture. However, by taking GDSR into account against TDSR, a lender is able to make some fairly key evaluations against applications for secured debts.
Because of the way in which securitization of debt is the key difference between as much as 6% in monthly interest charges, it is extremely valuable for a borrower to take the time to understand how it is that the two metrics interplay, and how to manage them for the best results.
