Mortgage Basics #Home Buying

Debt Service Ratios | How to Calculate GDS and TDS

Debt Service Ratios | How to Calculate GDS and TDS


Lenders consider a number of factors to determine whether or not you qualify for a loan as well as how much they can lend. Using a mortgage affordability calculator can give you an idea of how much you can borrow.

However, if you want to determine the maximum lenders can part with, then you need to be conversant with your debt service ratio, including GDS and TDS (you can calculate TDS using a TDS calculator).

Key Takeaways:

  • There are two categories of debt service ratios namely the gross debt service ratio and the total debt service ratio
  • CMHC recommends maximum limits for these debt service ratios and exceeding these limits would impact your ability to get a mortgage
  • You can calculate your debt service ratios using a debt ratio calculator canada

What is Debt Service Ratio?

The debt service ratio compares your current operating income to the amount of debt that you have. It is usually expressed as a ratio to enable entities who need them, like your lender, to quickly evaluate your ability to repay debts including loans and lines of credit. The major reason lenders use this is to determine whether you can take on more debt and just how much more debt you can handle. 

This ratio’s etymology comes from ‘debt service’ which refers to the total sum required to repay debts over a particular period. The typical time frame used for evaluation is a year. Under the debt service ratio, there are two calculations that a lender would usually carry out: 

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

Knowing your GDS ratio and TDS ratio is vital when applying for a CMHC insured mortgage because of the guidelines put in place by the CMHC. These guidelines state a maximum limit for GDS and TDS ratios beyond which you may experience difficulty qualifying for a mortgage. You can use a debt to income ratio calculator canada for determining the ratios. 

Debt service ratios also feature prominently when undergoing a mortgage stress test to qualify for a mortgage. To find out ahead of time whether your ratios measure up, you can use a debt service ratio calculator or debt ratio calculator. Sometimes, the term ‘debt coverage ratio’ may be used, however, it is more commonly used by firms or corporate bodies. 

Gross Debt Service Ratio (GDS)

What is GDS? The gross debt service ratio Canada refers to the portion of your pre-tax income that you would be spending on housing. The following expenses are used to calculate gds meaning that they are the major housing costs considered:

  • Property taxes 
  • Mortgage payments 
  • Utilities such as heating 
  • If applicable, 50% of condo fees

Your lender would typically sum this up and divide through by your gross annual income. The industry standard is 32%, and if your ratio comes in less, the lender may reconsider your ability to cover your monthly housing payments. If you are still wondering how to calculate gds, you can easily use a gds calculator or gdsr calculator.

What is the ​​CMHC GDS Ratio Limit?

The CMHC recommends 39% as the GDS ratio maximum limit. A GDS ratio in excess of 39% may imply that your income is minimal

compared to your housing costs. In other words, you may be unable to sustain or afford your payments.

To fix this, you can work on increasing your income or opt to buy a cheaper home, thereby requiring lower mortgage payments.

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)

Considering GDS vs TDS, the total debt service ratio considers the expenses highlighted by the GDS ratio, and then includes other debts that you already have. So, if you want to use a tdsr calculator, you would need to include the following:

  • Student debt 
  • Auto loans
  • Child support/ Alimony
  • Credit card payments 

In essence, to show how to calculate tds, your lender adds all of the payments used to calculate gross debt service and includes your debts to determine your TDS ratio. To calculate on your own, you can use a total debt service ratio calculator. 

Lenders typically use an industry standard of 40% maximum limit for the TDS ratio. However, if you are buying a home as a couple, you can exceed these ratios. This is because, in this scenario, lenders combine income and debts to calculate mortgage affordability. You can use a tds calculator Canada at any point to determine your ratio.

What is the ​​CMHC TDS Ratio Limit

The CMHC recommends a 44% as the maximum limit for tdsr meaning if your ratio exceeds 44%, your debts are costing you significantly in repayments or you have high housing costs. 

TDS ratio can be reduced by increasing income, paying off debt, or reducing your housing expenses. You can reduce housing expenses either by making a large down payment or opting for a cheaper home. 

Frequently Asked Questions: GDS & TDS

What happens if I’m over the debt service ratio limits?

If after using a GDS TDS calculator, you find that your ratios are above industry standard, then you want to do one or both of two things:

  • Pay off most of your debts before buying a home
  • Make a larger down payment 

However, if you have valuable assets or a high credit score, you may still be approved for a mortgage. This is because the 32% GDS and 40% TDS used by lenders are only a guideline and not standard. So, you can still qualify even if your ratios are slightly higher. Also, CMHC maximum limits are 39% for GDS and 44% for the total debt ratio. 

What is an acceptable debt service ratio?

An acceptable GDS TDS ratio stands at a maximum of 39% for GDS and 44% for TDS. However, going by industry standard which most lenders typically opt for, a maximum of 32% for GDS and 40% for TDS is more acceptable and desirable. To accurately determine your ratios, a gds or tds ratio calculator is a good call. 

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

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

  • Employment income 
  • Rental income 
  • Pension income 
  • Variable income that has a minimum of a 2-year history including investment income, self-employed income, commission income, bonus, amongst others 

Can I use rental income when applying for a mortgage?

Net rental income is permitted for use by the CMHC for calculating gross income only if the mortgage you are applying for isn’t for the rental property providing you with rental income. 

Similarly, CMHC permits only 50% of gross rental income from an investment property to be added to your gross income if you are applying for a mortgage on said rental property. Heating costs and taxes are exempted when calculating housing costs. 

If you have a two-unit owner-occupied property, implying that you are renting out a portion while living on the property as well, all of the gross rental income is regarded as your gross income. Policy may differ especially for alternative private mortgage insurers. 

Final Thoughts

Your debt service ratio canada plays a major role in determining whether you get a mortgage and how much you can afford. This is why using a gds and tds calculator to figure out where you stand is advised. A debt service calculator provides you with solid figures to work with and affords you the opportunity to develop a practical strategy to eventually achieve desirable ratios.

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