What Is an Ideal Debt Service Ratio for a Mortgage?

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When applying for a mortgage, you will undergo a financial assessment to determine what you can comfortably afford when purchasing a home. Lenders assess your income and debts, and this assessment determines your debt service ratios. These ratios compare your projected household expenses and current debts with your income to determine whether you have the financial means to carry a mortgage.

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Key Takeaways

• Debt service ratios measure how much of your gross income goes toward housing costs and total debt payments.
• Lower ratios improve mortgage approval odds and long-term financial flexibility.
• Lenders evaluate two ratios: gross debt service (GDS) and total debt service (TDS).

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What Is a Debt Service Ratio?

Debt service ratios compare your monthly debt obligations to your gross monthly income and are expressed as a percentage. Lower debt service ratios mean that you have less debt compared to your income, while higher ratios mean you have higher debt compared to your income. 

Debt service ratios have two components: gross debt service (GDS) and total debt service (TDS). Lenders use debt service ratios to assess your ability to handle a mortgage without becoming financially overextended.

Gross Debt Service (GDS)

Gross debt service ratios calculate the expected monthly household debts against your pre-tax income. GDS measures housing-related costs only. It includes:

• Stress-tested mortgage payment
• Property taxes
• Heating costs
• 50% of condo fees (if applicable)

Total Debt Service (TDS)

Total debt service ratios compare your expected monthly household costs and current monthly debt payments with your pre-tax income. TDS includes everything in the GDS calculation, plus all other monthly debt payments, including:

• Credit cards
• Lines of credit
• Personal loans
• Car loans and leases
• Student loans
• Child or spousal support

What Is Considered an Ideal GDS and TDS Ratio?

Ideally, the lower your GDS and TDS ratios, the more likely you will be approved for a mortgage. These ratios indicate how much cash flow you will have available after paying current and projected debts. You may not qualify for a mortgage if these ratios are too high. Lower ratios strengthen your mortgage application and provide a buffer to protect against future rate increases, income changes, or unexpected expenses.

Maximum GDS and TDS Ratios for Mortgages

Typically, for insured mortgages (high-ratio and insurable loans backed by Canada Mortgage and Housing Corporation, Sagen, or Canada Guaranty):

• Maximum GDS: 39%
• Maximum TDS: 44%

Typically, for uninsured mortgages (20% or more down payment):

• Maximum GDS: 35%
• Maximum TDS: 42%

​​How the Mortgage Stress Test Affects Your Ratios

Under mortgage stress test qualifying rules, borrowers must qualify at the minimum qualifying rate (MQR), which is the greater of 5.25% (the benchmark) or their contract rate plus 2%.

Even if your actual mortgage rate is lower, your qualifying payment is calculated at the higher stress-tested rate. That higher payment is what is used for your GDS and TDS calculations. The qualifying rate reduces your maximum borrowing capacity when assessing your debt service ratios.

Income Types Lenders Accept for GDS and TDS Calculations

When lenders calculate your GDS and TDS ratios, they include only stable, verifiable income. Most income must be supported by documentation such as pay stubs, T4s, Notices of Assessment (NOA), or deposit history, and some sources require a 2-year average to confirm consistency. Eligible income sources may include:

• Employment income (salary, hourly, and sometimes averaged with bonus or overtime)
• Self-employed, incorporated or partnership income (2-year average from NOAs and T1 Generals)
• Casual or contract (2-year average confirmed by T4s and LoE)
• Spousal or child support (with separation agreement and confirmed proof from deposit statements)
• Canada Child Benefit CCB (will require proof of the children’s date of birth)
• Canada Pension Plan CPP 
• Old Age Security OAS
• Employer Specified Pension Plan SPP
• Registered investment income (RIF, LIRA, LRSP, LIF)
• Disability Pension

Calculating Debt Service Ratios

Calculating your GDS and TDS ratios requires first adding up your expected monthly household debts against your income to determine your GDS ratio. For example, if you have a combined household income of $150,000 and are considering purchasing a $500,000 condo with a 20% downpayment at an interest rate of 5.09%, your monthly mortgage payments would be approximately $2,347 over a 25-year amortization. 

However, as you’ll need to be stress-tested to qualify, your qualifying mortgage payment would be $2,823.92 at a qualifying rate of 7.09%. Although your qualifying mortgage payment is higher, that’s not the amount you’ll pay when your mortgage is funded. Annual property taxes are estimated at 1%, heating costs at $100 per month, and condo fees at $500. 

GDS Calculation

GDS = (Monthly Mortgage Payment + Monthly Property Taxes + Monthly Heat + 50% Condo Fees) / Monthly Income

Monthly Mortgage Payment – $2,824

Monthly Property Taxes – ($500,000 x 0.01) / 12 = $416.67

Monthly Heat – $100

Condo Fees – $500 / 2 = $250

Monthly Income – $150,000 / 12 = $12,500

GDS = ($2,824 + $416.67 + $100 + $250) / $12,500

GDS = $3,591 / $12,500

GDS = 0.287 x 100 = 28.70%

Since the GDS is 28.70%, this falls comfortably under the maximum 35% GDS for uninsured mortgages with a 20% down payment. 

TDS Calculation

Knowing your GDS, you can calculate the TDS more easily. In addition to the expected household expenses, you have a line of credit with a $200 monthly payment, a car loan with a $300 monthly payment and a student loan with a $200 monthly payment. 

TDS = (GDS Debts + Current Debts) / Monthly Income

GDS Debts – $3,591

Current Debts – $200 + $300 + $200 = $700

Monthly Income – $12,500

TDS = ($3,591 + $700) / $12,500

TDS = $4,291 / $12,500

TDS = 0.343 x 100 = 34.30%

Since the TDS is 34.30%, this falls comfortably under the maximum 42% TDS for uninsured mortgages with a 20% down payment. 

​How Do I Lower My Debt Service Ratios?

Improving your GDS and TDS ratios can significantly increase the likelihood that your mortgage will be approved. Paying down revolving high-interest debt, especially credit card debt, can improve your TDS quickly, since lenders often calculate credit card debt obligations at 3% of the outstanding balance. 

• If you have savings, you could make a larger down payment to lower your monthly mortgage payments.
• Choose a home with a lower purchase price to reduce monthly mortgage payments.
• Choose a home without condo fees.
• Pay down existing debt, especially high-interest credit cards and unsecured loans.
• Consolidate your debt into a lower-interest loan or line of credit with a single monthly payment.
• Increase monthly household income. 
• Add a co-signer or guarantor to the mortgage to increase the monthly income.

Debt Service Ratios and Your Credit Score

Your credit score can affect the ratios your lender uses to qualify you for a mortgage. Generally, the lower your credit score, the lower your qualifying ratios will need to be to secure an uninsured mortgage. If you have good or excellent credit, your qualifying ratios can be higher, as long as they don’t exceed the maximums allowed by your lender and the type of mortgage. Lenders typically consider the credit score of the lower-scoring borrower on joint applications. The insurer controls the ratios for insured mortgages and keeps them set at 39% and 44%.

Frequently Asked Questions (FAQ) About Ideal Debt Service Ratios for Mortgages in Canada

Final Thoughts

When applying for a mortgage, your debt service ratios are crucial in determining your ability to manage and take on additional debt. These ratios measure how much of your income will be used to cover your current debt and future mortgage payments, allowing lenders to better understand your financial situation. 

Lenders use GDS and TDS ratios to assess your capacity to take on a mortgage and your likelihood of making timely repayments. If your debt service ratios are too high, you may only qualify for a mortgage if you work toward reducing your current debts. 

Speak with nesto mortgage experts today to help you better understand your borrowing capacity.

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