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Debt service ratios - GDS and TDS

When buying a home, a key step is determining how large of a mortgage you can qualify for. This will help establish your overall home buying budget. There are two key debt service ratio calculations that lenders use when figuring out how much you can afford to borrow for a new home purchase: your gross service ratio (GDS) and your total debt service ratio (TDS). Read on to see how both of these calculations work.

You can also check out our handy mortgage affordability calculator to see how much mortgage you may qualify for.

How to calculate your 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.

GDS calculation

[Mortgage payments + Property taxes + Heating costs + 50% of condo fees]

÷ Annual income

= Ratio (should be < 32%)

How to calculate your 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.

TDS calculation

[Housing expenses (per GDS) + Credit card interest + Car payments + Loan expenses]

÷ Annual income

Also read: How much mortgage can I afford in 2023?

What is the maximum TDS or GDS for a mortgage?

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.

What happens if my mortgage debt service ratios are too high?

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. According to the Canada Mortgage and Housing Corporation, the maximum GDS and TDS allowed is 39% and 44%, respectively.

How can I improve my GDS or TDS?

If your mortgage debt service ratios are too high to qualify for a mortgage, there are several steps you can take to improve them over time:

• Increase your income: Earning more money will help reduce the ratio of your earnings that go toward servicing debt, which will lower your overall ratios.
• Pay down debt: Focusing on a dedicated debt-reduction plan will also improve your ratio, and help you better qualify for a mortgage.
• Reduce your home buying budget: Purchasing a less expensive home will help reduce the housing expenses portion of your ratio calculations, and improve your overall ability to get a mortgage.
• Make a larger down payment: If possible, making a bigger down payment will reduce the size of mortgage that you’d ultimately need, reducing the housing expenses portion of your ratio calculation.