When applying for a mortgage, lenders assess your overall financial situation to determine how much you can afford. Two key ratios used in this process are Gross Debt Service (GDS) and Total Debt Service (TDS). These ratios help lenders evaluate your ability to manage mortgage payments, ensuring you don’t overextend yourself financially. Here's exactly what each of them mean, and the impact they have on your mortgage application.
Rule 1. Gross Debt Service (GDS) Ratio = 39% MAXIMUM*
GDS measures the percentage of your gross income (before taxes are deducted) that goes toward covering your costs. These costs typically include:
- Mortgage Payments (principal and interest)
- Property Taxes
- Heating Costs (Usually $100 per month)
- 50% of condominium fees (if applicable)
The Formula
GDS = (Mortgage Payment + Property Taxes + Condo Fees/2 + Hydro) / Income
The Rule
Lenders typically prefer that your GDS ratio doesn’t exceed 39% which theoretically ensures that your housing costs remain within a manageable portion of your income.
Rule 2. Total Debt Service (TDS) Ratio = 44% MAXIMUM*
TDS expands on the GDS ratio by including ALL of your other debt obligations, in addition to housing costs. This gives lenders a broader view of your overall financial commitments and picture. TDS considers:
- Housing Costs (mortgage, property taxes, heating, condo fees)
- Car Loans
- Credit Card Payments
- Student Loans
- Personal Loans
- Lines of Credit
The Formula
TDS = (Mortgage Payment + Property Taxes + Condo Fees/2 + Hydro + Car Loan) / Income
The Rule
For TDS, lenders typically prefer a ratio of 44% or lower. This ensures that all your debt payments, including your mortgage, remain affordable based on your income.
*TDS requirement can be lower due to specific lender appetite for risk.
Why Are GDS and TDS Ratios Important?
Lenders use these ratios to assess your risk as a borrower. By keeping GDS and TDS within insurer’s guidelines, lenders can ensure you have enough disposable income for other expenses and can comfortably manage your mortgage payments. This limits risk for lenders and homeowners. If your GDS or TDS ratios are too high, you may not qualify for a mortgage or you may be approved for a lower loan amount (ie you’ll have to come up with more down payment).
How to Improve Your GDS and TDS Ratios
If your ratios are above the recommended limits, you can improve them by:
- Increasing your Income (through salary negotiations, side jobs, etc.)
- Paying off existing debts (this lowers your TDS ratio)
- Saving for a larger downpayment (this reduces your mortgage amount and improves your GDS ratio)
Understanding these ratios is crucial for getting mortgage approval and ensuring long-term financial stability.
If you want help understanding your TDS and GDS ratios, or to discuss mortgage options in Oakville, Burlington, Missisauga or nearby areas, I am happy to schedule a call!
