# Understanding GDS and TDS: how much can you afford?

When shopping around for a mortgage, there’s more to think about than simply finding the best mortgage rates. It’s important to also consider the terms and conditions of your mortgage, the size of your down payment, and whether or not you can afford the home—and monthly mortgage payments—you’re thinking about.

While there are handy tools like a mortgage affordability calculator to help you figure out what you can afford, it’s a good idea to understand how lenders calculate your affordability and the formulas they use to do so.

There are two standard measures of affordability lenders use to determine how much they’ll lend you. First, your Gross Debt Service Ratio (GDS) is calculated. This is the percentage of your income needed to pay all monthly housing costs: your mortgage, property taxes, heat, and 50 per cent of your condo fees (if applicable). The industry standard for GDS is 32%, meaning you typically need a GDS lower than 32% to qualify for a particular mortgage.

Next, a lender will calculate your Total Debt Service Ratio (TDS), which is similar to a GDS but also takes into account your other monthly debts, like credit card payments, car payments, alimony, and loans. The industry standard for TDS is slightly higher than GDS at 40%.

To calculate your GDS, a lender will combine your monthly housing-related costs (Principal, Interest, Property Taxes, and Heating), then divide those costs by your gross income. That figure is then multiplied by 100, resulting in your GDS percentage.

Let’s say you are in the following financial situation:

In order to calculate your GDS, you’ll want to make sure all payments are for the same time period – typically annual.

 Annual Mortgage Payments \$1,246 x 12 = \$14,880 Annual Maintenance Fees \$300 x 12 = \$3,600 Annual Property Taxes \$2,500 Annual Heating Cost \$75 x 12 = \$900 (industry standard)

Once you’ve made the necessary annual calculations, you can begin to calculate your GDS.

In this scenario, your GDS falls within the acceptable industry standard of 0% to 32% so you would qualify for a mortgage with most lenders.

When calculating TDS, only monthly payments that are related to an existing debt are used – so things like car insurance, life insurance, or RRSP contributions are not a factor.

Let’s say that in addition to the above figures, you also have the following debts:

Again, you’ll need to convert these monthly payments to an annual amount.

 Annual Car Payment \$200 x 12 = \$2,400 Annual Student Loan Payment \$260 x 12 = \$3,120