Understanding GDS and TDS: Debt Service Ratios and Mortgages

Once the banks or other lenders decide you have the right credit score to get a mortgage, how do they figure out how much they should loan you?

Do they check your social media accounts to see if you would be a fun neighbour? 

Or do they ask you interview-style finance questions to gauge your bill paying knowledge?

No, of course not.  

They turn to mathematics and use the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios.  

The GDS and TDS ratios measures your debt to income levels and then determines the maximum mortgage amount you can qualify for.  These ratios measure the percentage of your income that you will need in order to cover your housing costs and debt obligations. 

You need to come in under the maximum threshold for both ratios in order to be approved for your mortgage.

Debt Ratios 

Both calculations include your mortgage payment (principal + interest).  The monthly mortgage payment figures for these ratios are calculated based on the mortgage stress test rate of 5.25%, which is the Bank of Canada’s qualifying rate.  

Even if your actual interest rate is 2.50%, the lenders use the stress test rates to calculate your GDS and TDS ratios.

Gross Debt Service (GDS)

This is the sum of your total mortgage payment (consisting of your principal and interest), property tax and heating costs divided by your income.  The maximum GDS is 39%.  You cannot go higher than that on a conventional uninsured mortgage.

As of July 2020, the maximum GDS = 35% if you have an insured mortgage.

When calculating the costs for these ratios, there are some calculation quirks.  One of them centres around condo maintenance fees.  

According to the CMHC, condo maintenance fees are calculated into these ratios at 50% of their actual cost.  If your monthly condo maintenance fee is actually $300, only $150 is used for the GDS calculation. 

The Gross Debt Service (GDS) Ratio Formula

GDS = (mortgage payment + heat + property taxes) / income

Assume you make $5,000 per month (gross income).

Suppose your monthly payments are:

  • Mortgage payment = $1,200
  • Heating bill = $100
  • Property taxes = $300

Your Gross Debt Service (GDS) is: 

GDS = (mortgage payment + heat + property taxes) / income

GDS = (1,200 + 100 + 300) / 5,000

GDS = 1600/5,000

GDS = 0.32 or 32%

In this case, you would qualify based on your GDS score alone. 

Total Debt Service (TDS) Ratio Formula

The TDS ratio includes any other debts you may have.  The maximum TDS is 44%.  You cannot go higher than that percentage. If you have an insured mortgage, the TDS maximum limit is 42%. 

The CMHC states that credit cards and lines of credit should be calculated at a rate of 3% of the balance you owe as a monthly rate.

Therefore, if you have an outstanding credit card balance of $1,000, then you will use a debt payment of 3% of that $1,000 total, which is $30 per month. 

Examples of other monthly obligations that you have to include here are student loans, child support and alimony.

TDS = (mortgage payment + heat + property taxes + all other debt payments)/ income

Suppose you have debt payments of $150 on top of the expenses calculated for the GDS. 

TDS = (mortgage payment + heat + property taxes + all other debt payments)/ income

TDS = (1,200 + 100 + 300 + 150)/ 5,000

TDS = 1,750 / 5,000

TDS = 0.35 or 35%

Since the ratio is under 44% you would qualify.   

GDS and TDS: What if You Don’t Qualify? 

If you have an insured mortgage (less than a 20% down payment) your GDS maximum limit will be 35% and your TDS maximum limit would be 42%. 

If you have an uninsured mortgage (more than a 20% down payment) your GDS maximum limit will be 39% and your TDS maximum limit would be 44%.

If your ratios are too high, there are a few things you can do.  You can increase your income, lower your expenses, or search for a less expensive home, which would mean a lower mortgage payment.

Or you could increase your down payment amount or try amortization your mortgage for a longer time. 

The Banks Say This, You Say….

The interesting thing about the GDS and TDS ratios is that it is solely based on your gross income and a few expense categories. 

Lenders will help you qualify for the largest mortgage they can without asking about your financial or family situation. 

If you are a dual-income couple with no kids or cars your expenses will probably be lower than a family that has two kids and a newly financed car.

However, lenders would evaluate both families based on their income using these ratios.  If both family units earn the same amount of money, the banks don’t really care about the monthly expenses each family has outside of the ones used to calculate the GDS and TDS.

The lenders always have their bottom line in mind and not necessarily your best interests.  You need to determine whether you can afford the mortgage the bank is approving you for. Don’t let anyone else do it for you.  You don’t want to end up being house poor and unable to save money at the end of the month. 

Recall that condo fees are only calculated at half the rate for the GDS and TDS calculations, but you still have to pay the full amount in reality. 

Before you go to the bank or credit union, make sure you prepare your own budget.  Don’t forget, you still need to pay monthly for other expenses that were excluded from these ratios like:

  • Phone
  • Internet
  • Cable or streaming
  • Subscriptions
  • Home and car insurance

If you get approved for a $500,000 mortgage but it leaves you with a $2,000 per month mortgage payment and a negative monthly budget balance, then guess what you need to do? 

Either you need to make more money, reduce expenses, find ways to save money, or find a less expensive house. 

GDS and TDS Debt Service Ratios Conclusion

For GDS and TDS ratios, the lower your ratio, the better. 

Unfortunately, in the third quarter of 2021, the CMHC’s Residential Mortgage Industry Report stated that over half (54%) of new uninsured mortgages had a TDS ratio of 40% or more at the chartered banks.

Canadians are stretching themselves to the limit to get approved for mortgages, likely because of runaway house prices. 

Make sure you run your own budget and see if you can truly afford the house you want.

GDS and TDS Debt Service Ratios FAQs

How do I calculate TDS?

Your total debt service ratio is the summation of your mortgage payment, heating costs, property taxes and all other debt payments divided by your monthly gross income.  The maximum total debt service ratio is 44% (for an uninsured mortgage).  

What’s the difference between TDS and GDS?

The difference between the total debt service (TDS) and the gross debt service (GDS) ratios is that the TDS adds all other debts you have on top of all the housing costs associated with the GDS.  

The GDS is comprised of your mortgage payment, heat and property taxes, which are sometimes known as “housing costs”. 

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