Debt service ratios - GDS and TDS
While it's easy to use our mortgage affordability calculator to figure out how much you can afford to borrow for a new home purchase, it's a good idea to understand how lenders calculate the maximum amount they will loan you. The two calculations a lender does are: your gross debt service ratio (GDS) and your total debt service ratio (TDS). To see how both calculations work, watch the video and read more below.
Gross Debt Service Ratio
+ Property taxes
+ Heating Costs
+ 50% of condo fees]
÷ Annual Income
= Ratio (should be < 32%)
Total Debt Service Ratio
[Housing expenses (per GDS)
+ Credit card interest
+ Car payments
+ Loan expenses]
÷ Annual Income
While the guidelines state that your GDS should be no more than 32% and your TDS should be no more than 40%, most borrowers with good credit and a reliable income will be allowed to exceed these guidelines.
The maximum GDS limit used by most lenders to qualify borrowers is 39% and the maximum TDS limit is 44%.
As of July 1st, 2020, the CMHC implemented new GDS and TDS limits for mortgages that it insures. The new GDS/TDS limits for CMHC-insured mortgages is 35/42.
The CMHC changes will have minimal impact on borrowers as GenWorth Financial and Canada Guaranty, the two other mortgage insurance providers in Canada, did not follow suit and change their limits. Consequently, mortgage lenders will continue to use the maximum limits available through the other insurers.
Want to know how much you can afford?
Gross Debt Service Ratio (GDS)
To calculate your GDS, lenders try to figure out the proportion of your income you would be paying each month to own a particular property. First, the lender will estimate your annual mortgage payments, property taxes, heating costs and 50% of your condo fees (if applicable). The lender will then add that up and divide it by your gross annual income. If the answer equals less than 32% (industry standard), the lender can feel confident in your ability to pay your monthly housing costs.
Total Debt Service Ratio (TDS)
To calculate your TDS, the lender will take the same GDS calculation but add in any other monthly payments you might have to make, including loans or the minimum payments on any credit card debt. So, the lender adds together your mortgage payments, property taxes, heating costs, 50% of your condo fees and debts, and divides the total by your gross annual income. If the answer equals less than 40% (industry standard), the lender will know you have the money to make all of your monthly payments and you will be on track with getting approved for a mortgage.
What happens if I'm over the industry standard?
If either of your answers go over than the industry standards, you may want to save more for your down payment and/or pay off some existing debt before buying. However, the 32% GDS and 40% TDS standards are guidelines, not rules. If you have a high credit score or some valuable assets, you may still qualify for a mortgage, even if your GDS and TDS are slightly higher than the industry standards. The maximum GDS and TDS allowed is 39% and 44%, respectively.