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Have you ever crunched the numbers to see how much of your income is being spent on bills?

You should because your debt relative to your income plays a key role in your ability to secure a mortgage

More specifically, your debt service ratio is a metric used by lenders to determine the likelihood of mortgage approval.  

So, what exactly is a debt service ratio, how do you calculate it, and how does your specific ratio hold up when it comes to applying for a mortgage?

What Is A Debt Service Ratio?

A debt service ratio measures how much of your income covers your current debt. It is calculated by dividing your debt by your gross income. There are also debt service calculators available online that you can use to quickly calculate these ratios.

There are two slightly different debt service ratios that lenders use to assess a borrower’s ability to secure a loan, and how much of a loan they may be approved for: Gross Debt Service (GDS) and Total Debt Service (TDS).

What Is The Gross Debt Service (GDS) Ratio?

The Gross Debt Service (GDS) ratio is the percentage of your pre-tax income that would be used to pay for all housing costs. 

Generally speaking, your GDS should not be higher than 39%, particularly if your mortgage is insured. If your GDS ratio exceeds this limit, it could mean that your income isn’t high enough to cover your housing expenses. In this case, you may be at risk of being turned down for a mortgage. 

You can try lowering our GDS ratio by lowering your housing costs by looking for a cheaper house or by putting down a higher down payment (which can lower your mortgage payments). Similarly, you can reduce your GDS ratio by temporarily increasing your income. 

What Types Of Debts Are Included When Calculating Your GDS Ratio? 

Housing costs included in your GDS ratio calculation are as follows:

  • Mortgage payments (including principal and interest)
  • Heating bills
  • Condo fees (if applicable)
  • Property taxes

How Do You Calculate The GDS Ratio?

Your GDS is calculated by dividing all your housing costs by your gross income. You can either use your monthly or annual housing costs and income for this calculation. 

Here’s an example. 

Monthly housing costs$2,500
(Principal and interest: $2,000, Heat: $200, Property taxes: $300)
Monthly gross income$6,500
GDS Ratio 0.384
($2,500 ÷ $6,500)
GDS Percentage38.4%
(0.384 x 100)

In this example, your GDS would be 38.4%. Based on the Canada Mortgage and Housing Corporation’s (CMHC) cap of 39%, your GDS ratio would fall within an acceptable range. 

What Is The TDS Ratio?

The Total Debt Service ratio is the percentage of your pre-tax income that would be used to pay for all housing costs, plus all your other debt obligations.

Your TDS should not exceed 44%. Like your GDS, a high TDS ratio could indicate that your overall debt load is too much for your income to handle. Keeping your ratio under the 44% threshold will increase your chances of getting approved for a loan. 

What Types Of Debts Are Included In The TDS?

Your TDS includes all GDS housing costs (ie. mortgage payments, property taxes, heat, and condo fees), as well as all other debts you’re carrying, such as: 

How Do You Calculate The TDS?

Your TDS is calculated by dividing your housing costs and all other debt obligations by your gross income. To illustrate how this ratio would be calculated, let’s use the same figures as we used to show how a GDS would be calculated, plus other debt obligations:  

Monthly housing costs$2,500
(Principal and interest: $2,000, Heat: $200, Property taxes: $300)
Other monthly debts$1,000
Total monthly debts$3,500
Monthly gross income$6,500
TDS Ratio 0.538
($3,500 ÷ $6,500)
TDS Percentage53.8%
(0.384 x 100)

In this example, your TDS would be 53.8%, which exceeds the CMHC’s TDS cap of 44%. In this case, your lender may view you as a potentially risky borrower. Before you apply for a mortgage, you may want to pay down some of your debt or try to increase your income to boost your chances of loan approval.

Does Rental Income Affect GDS And TDS Ratios?

Your GDS and TDS ratio calculations may include various income sources, including rental income. The CMHC allows net rental income to be used for these calculations, though the exact amount that may be used depends on whether you’re applying for a mortgage for the rental property that the rental income is coming from.  

If you’re applying for a home loan on an investment property:

  • No more than 50% of your gross rental income from the property can be used as part of your gross income. Property taxes and heat can be excluded from the calculation of your GDS and TDS ratios. 
  • Up to 100% of the gross rental income may be used to calculate your debt service ratios if you’re living in the home that you’re earning rental income from.

If your rental property is not the subject of the home loan application, you can use your net rental income as part of your gross annual income. 

That said, the rules may differ if you’re working with an alternative lender. Each lender has their own specific policies when it comes to how rental income is used when assessing your gross income. 

Does Child Support, Spousal Support Or Alimony Affect The GDS And TDS Ratio?

Most lenders consider child or spousal support payments as debts, just like car loan payments and credit card payments. Since alimony and child support payments are considered debt, they’ll impact GDS and TDS ratios. How they affect your ratios depends on whether you’re the person making these payments or receiving them.

  • Person Giving: If you’re required to pay alimony or child support, you’ll need to include these payments as part of your overall debt, which will increase your TDS ratio.
  • Person Receiving: If you’re on the receiving end, these payments may be added to your income, which can decrease your TDS.

How Do I Find My Heating Costs?

You can find your heating costs on your monthly utility bill statements that you receive either through mail or email. Heating your home may come from various sources, such as:

  • Electric
  • Natural gas
  • Oil 

The main heat sources of your home depend on where you live. Over half of homes in Canada are heated via forced air furnaces, while a quarter use electric heaters. You’ll need to locate your heating bills from your local utility companies to add up how much you spend to heat your home each month. 

How Do I Find My Property Tax Costs?

Property taxes are charged by local governments to homeowners and are calculated by multiplying the assessed value of the property by the property tax rate in the area. Generally speaking, municipalities will send you two property tax bills each year: an interim bill that includes property taxes owed for the first half of the year, and a final property tax bill that details the cost of taxes for the full year. 

What Happens If Your GDS And/Or TDS Is Over The Limit?

As mentioned, the CMHC sets limits on GDS and TDS ratios for insured mortgages at 39% and 44%, respectively. But lenders may also have their own debt service ratio caps, depending on other variables. 

If your ratio exceeds these limits, you could be denied a loan. And if you’re approved, you may be charged a higher interest rate to offset the added risk assumed by the lender. 

If your GDS and TDS ratios are over the limit, you should make an effort to reduce them before applying for a loan. Some ways to lower these ratios are as follows:

Pay Down Your Debts

Your debt load is one of the two numbers used to calculate your GDS and TDS ratios. The higher your debt, the higher your debt service ratio will be. So, you may want to work toward paying down your debt as much as you can to bring your ratios down to a more acceptable level. 

Make A Bigger Down Payment

A larger down payment means a smaller loan amount. In turn, this means lower monthly mortgage payments, which are used to calculate your debt service ratios. If your housing costs are reduced, your GDS and TDS ratios will be lower as well.

Buy A Cheaper Home

Consider looking at homes within a lower price range. Spending less on a home also means reducing your mortgage amount. Again, bringing your housing costs down will ultimately result in lower GDS and TDS ratios.

Final Thoughts

Understanding your GDS and TDS ratios is essential when it comes to how likely you are to get approved for a mortgage. If you find that your ratios are a bit high, consider taking some time to pay down your debt, boost your income, or simply choose a more affordable home to lower your mortgage costs.  

debt service ratio FAQs

Does CMHC default insurance affect the TDS/GDS ratios?

If you put less than 20% down on a home purchase, your mortgage must be insured. The CMHC is the largest mortgage default insurance provider in Canada. CMHC-insured mortgages are limited to a maximum GDS of 39% and a maximum TDS of 44%.

Are condo fees included in the ratios?

Yes, if you pay condo fees, these are considered part of your housing costs and will be included in the calculation of your GDS and TDS ratios.

How does the mortgage stress test affect these ratios?

The mortgage stress test requires you to qualify for a mortgage at a higher interest rate than what is currently posted if rates increase in the future. As such, your monthly housing costs may appear higher, which will increase your GDS and TDS ratios.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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