The total annual cost of mortgage payments -- both principal and interest -- on an investment property. Lenders evaluate your ability to service debt using ratios like the Gross Debt Service (GDS) ratio and Total Debt Service (TDS) ratio. For rental properties, lenders typically allow a portion of the expected rental income to offset the debt servicing cost when qualifying you for financing.
Why It Matters
Debt servicing is the single largest expense for most rental property owners. If interest rates rise at renewal, your debt servicing costs jump and can turn a profitable property into a money pit. Always calculate your debt servicing at both current and higher rates before purchasing, and keep cash reserves for rate increases.
Real-World Example
You want to buy a $600,000 rental condo in Vaughan with 20% down. Your $480,000 mortgage at 5.5% has monthly payments of $2,920. The lender calculates your GDS ratio using the stress-test rate of 7.5%, which would push payments to $3,480. They allow 50% of the expected $2,400 monthly rent as income offset. Even with the rental offset, your debt servicing ratios must stay below 39% GDS and 44% TDS including all other debts like car loans and credit card minimums.
Ontario & GTA Context
Canadian lenders apply the federal stress test to all mortgages, qualifying borrowers at the greater of the contract rate plus 2% or 5.25%. For rental properties, most lenders use a rental offset of 50% to 80% of gross rent to help with qualification, but the exact percentage varies by institution. Ontario investors with multiple properties may face stricter rules, with some lenders capping the number of financed properties at four or five.
How It Works in Practice
Before shopping for an investment property, get a pre-approval that specifically accounts for rental income offset. Calculate your debt servicing at both the current rate and the stress-test rate, and keep at least six months of mortgage payments in reserve to handle vacancies or rate shocks at renewal.
Common Questions
What debt service ratios do lenders look for on rental properties?▾
How does rising interest affect debt servicing on my rental?▾
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