# Debt Service Ratios | How To Calculate GDS And TDS

Written by
| May 6, 2024
Reviewed, May 6, 2024
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Borrowers must consider several factors beyond the mortgage rate, down payment, and closing costs when applying for a mortgage. Lenders that provide the best prime mortgage rates must use certain debt service ratios to stress-test borrowers’ ability to service their household and total debts. These ratios are Gross Debt Service (GDS) and Total Debt Service (TDS).

In this blog post, we aim to explain how these debt service ratios factor into the overall qualifying risk criteria that the lender uses to assess your borrowing capacity.

Key Takeaways:

• There are two debt service ratios – GDS and TDS.
• GDS – Gross Debt Service measures the borrowers’ capacity to manage household debts.
• TDS – Total Debt Service measures the borrowers’ capacity to manage their household and other debts.

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## What Is Debt Service Ratio?

The debt service ratios, or mortgage lending ratios, measure the debt payments over the income on the same frequency.  This ratio is expressed as a factor that allows the lender or underwriter to quantify the risk to service the debt based on a borrower’s income

Gross Debt Service (GDS) and Total Debt Service (TDS) are debt service ratios. As the names suggest, the GDS ratio calculates the household debt-carrying capacity against an applicant’s qualified income. The TDS ratio calculates the total debt-carrying capacity against a borrower’s income. On joint applications, ratios for qualifying applicants are combined debt payments and incomes for multiple borrowers.

Typically, insured or insurable transactions, where the purchase price or assessed value is under \$1M and the mortgage amortization is up to 25 years, will lend up to 39% on GDS and 44% on TDS ratios. Some lenders will use different ratios due to their risk appetites.

It doesn’t matter if you calculate the ratio using monthly payment and income frequency or annualized payments and income frequency. The ratio as a factor of the repayment amount over income should still be the same.

Under the debt service ratio, there are two calculations that a lender would generally assess for a borrower, or in the case of a joint application, for borrowers:

• Gross debt service ratio (GDS)
• Total debt service ratio (TDS)

Calculating your GDS ratio and TDS ratio is vital when applying for a mortgage in Canada. Every lender has guidelines to assess the risk they are willing to take on a client’s mortgage when it is not insured by default insurance

Note: You must pay for default insurance on high-ratio mortgages. This is in the form of an insurance premium charged as a percentage of your borrowed mortgage amount.

If you require mortgage default insurance (mandatory when you put less than 20% down payment), ranging from 2.8% to 4% of the borrowed mortgage amount can be added to your mortgage and paid as part of your total mortgage amount.

You can also choose to pay it upfront in cash and not add it to your mortgage balance, saving interest on that amount over the life of your mortgage.

Mortgage Default insurance provided by one of Canada’s 3 high-ratio default insurers, Canada Mortgage Housing Corporation (CMHC), Sagen (GE) or Canada Guaranty (CG), is only available for properties with a purchase price or valuation under \$1 million.

This means you cannot use a high-ratio mortgage if you plan on purchasing a home over \$1 million. Instead, to purchase a home that costs more than \$1 million, you must make a down payment of 20% or more for a conventional (uninsured) mortgage.

## Gross Debt Service Ratio (GDS)

What is GDS? The gross debt service ratio in Canada refers to the portion of your pre-tax income you would spend to service household debts. The following components that comprise your household debt payments are used to calculate GDS:

• Mortgage payments
• Property taxes
• Heating (each lender will have criteria usually based on the subject property’s square footage)
• 50% of applicable condo or maintenance fees (in some provinces, known as tenancy or strata fees)

### GDS Calculation & Example

Income – \$89,000 annually / 12 = \$7,416 (this one should be rounded down to be conservative)

GDS = (Mortgage Payment + Property Taxes + Condo Fees/2 + Hydro) / Income

GDS = (2000 + 292 + 350/2 + 100*) / 7416 = 34.61 (usually rounded to two decimal places)

Typically, the required GDS will change from lender to lender based on risk tolerance. However, if the mortgage is insured, you can assume that a GDS ratio of up to 39% is acceptable.

### What Is The ​​CMHC GDS Ratio Limit?

CMHC default-insured mortgages are qualified and limited to a maximum of 39% on the GDS ratio maximum limit.

Adhering to the CMHC GDS limit is essential for being approved for a loan and maintaining financial stability over the long term. Understanding how much money you can afford to spend on housing-related expenses can give you a realistic view of what kind of property you can buy and help guide your budgeting process.

Note: When navigating these complex calculations and regulations, use an experienced mortgage expert.

### Mortgage payment plans aren’t meant to be one-size-fits-all.

Chat with a nesto mortgage expert & get a mortgage payment fit to you.

## Total Debt Service Ratio (TDS)

What is TDS? The total debt service ratio in Canada refers to the portion of your pre-tax income you would spend to service all your debts. The following components that comprise your total debt payments are used to calculate TDS:

• Household debts (mortgage payments, property taxes, heating costs, condo fees if applicable)
• Student or car loans (greater than the amount charged or reported on your credit report)
• Child or spousal support (as reported on your separation agreement and confirmed from your bank account transactions)
• Credit card or line of credit payments (usually calculated as 3% of the balance)

### TDS Calculation & Example

Income – \$89,000 annually / 12 = \$7,416 (this one should be rounded down to be conservative)

TDS = (Mortgage Payment + Property Taxes + Condo Fees/2 + Hydro + Car Loan) / Income

TDS = (2000 + 292 + 350/2 + 100* + 325 ) / 7416 = 39.00 (usually rounded to two decimal places)

Typically, the required TDS will change from lender to lender based on risk tolerance. However, if the mortgage is insured, you can assume a TDS ratio of up to 44% is acceptable.

### What Is The ​​CMHC TDS Ratio Limit?

CMHC default-insured mortgages are qualified and limited to a maximum of 44% on the TDS ratio maximum limit.

Sticking to the CMHC’s TDS limit ensures that you are financially secure enough to manage your existing debts and any new mortgages you plan on taking out. It’s important to note that lenders may have internal policies that require even lower TDS ratios than what is mandated by CMHC.

Note: When navigating these complex calculations and regulations, use an experienced mortgage expert.

## How To Estimate Mortgage Payments

To estimate your mortgage payment, you must gather some key information.

First, you must determine the mortgage amount, the purchase price or home valuation, less your down payment (or equity in the home), and applicable default insurance if the home is purchased with less than 20% down payment.

Second, you’ll need the interest rate you anticipate paying or have already been offered and the amortization period – the number of years you want to take to pay off the mortgage. For insured mortgages, the maximum amortization is capped at 25 years

Although there’s a mathematical equation for determining your mortgage payments manually, it’s much easier to let nesto’s Mortgage Payment Calculator do the work for you.

Note: A qualifying mortgage payment used to calculate your debt service ratios is the greater of your mortgage payment or the stress-tested mortgage payment.

Welcome to our Frequently-Asked Questions (FAQ) section, where we answer the most popular questions designed and crafted by our in-house mortgage experts to help you make informed mortgage financing decisions.

### What happens if I exceed the debt service ratio limits?

If you find that your ratios are above industry standard, then you want to do one or both of two things:

• Make a larger down payment

However, you may still be approved for a mortgage if you have valuable assets or a high credit score.

### What is an acceptable debt service ratio?

Acceptable GDS and TDS ratios are 39% and 44%, respectively. However, lenders may use their criteria based on the risk they will take on the money they lend out or on uninsured purchases/renewals/refinance.

Refinances are considered uninsured transactions and, therefore, have higher risk attached to them. Lenders will price the higher risk based on the number of exceptions to their policy they will make in exchange for the risk they are taking on with a specific mortgage.

### What income sources can be used when calculating my debt service ratios?

Income sources used for calculating your debt service ratios include the following:

Sole Proprietor or Incorporated IncomeIf you’re self-employed, as in a sole proprietor or incorporated, things can get a bit more complicated, It is recommended that you book a meeting and speak with one of our mortgage experts who can work out your annualized income correctly from some specific lines in your T1 Generals (T1s) and Notice of Assessments (NOA).  It would be best to keep your T1s and NOAs handy during your meeting with one of our knowledgeable and commission-free experts.

Note: BFS individuals must be able to show that any taxes owed to the Canada Revenue Agency (CRA) are fully paid off before any mortgage commitment is issued. The lender will request a CRA Balance of Account Statement to confirm this.

Casual / Contract / Partnership Income – Generally, a 2-year average is calculated as a combination of the above Bonus Income and/or Self-Employed.

Spousal/Child Support – Generally, rules vary between lenders. Still, for these types of payments, you must show 2 months’ deposit history in a bank account in your name alongside a completed separation agreement/affidavit.

Canada Child Benefit (UCCB) – Rules will vary between lenders, but generally, only the federal portion can be used towards qualifying income for children under 12.  You will need the annual statement, proof of birth certificate and 2 months’ deposit history into a bank account in your name.

Canada Pension Plan (CPP) – You can use this income to qualify for your mortgage. You will need the T4A for the past year and 2 months’ deposit history into a bank account in your name.

Old Age Security (OAS) – You can use this income to qualify for your mortgage. You will need the T4A for the past year and 2 months’ deposit history into a bank account in your name.

Employer Specified Pension Plan (SPP) – You can use this income to qualify for your mortgage. You will need the pension statement for the past year and 2 months’ deposit history into a bank account in your name.

Investment Income (RIF/LIF/LRSP/LIRA) – Rules will vary between lenders; however, depending on the type of investment, you could use this income. Generally, taxable income  Alongside, you’ll need 2 months’ deposit history into a bank account in your name.  Additionally, you must show enough savings to receive the same payments over 5 to 10 years or sometimes just over the mortgage term.

## Final Thoughts

Calculating GDS and TDS debt service ratios can feel like taking a college algebra exam – both are seemingly simple, yet more difficult with adding a few variables. However, it’s an important step in qualifying for a mortgage. After all, no lender wants to lend money to someone who cannot afford the monthly payments.

Your GDS and TDS are one piece of the larger puzzle. At nesto, we have commission-free mortgage experts available to help guide you through this process. You don’t need to know what GDS or TDS stands for (gross debt services and total debt services), but you should know how they can help you reach your goal of homeownership.

In just a few clicks, you can see our current rates. Then apply for your mortgage online in minutes!

### Best Mortgage Rates

Fixed
Variable
in

0.00%3 Year Fixed

0.00%5 Year Fixed