If you’re shopping for a mortgage in Toronto, then you need to know your Gross Debt Service and Total Debt Service ratios (Or GDS and TDS). But what are they? For most borrowers, it’s a complete mystery! Check out this survey I made on Facebook. Only 1 in 12 people were told what theirs were, let alone what it meant!
Did you know that banks use these ratios as a key qualification factor to approve your mortgage? So wouldn’t it make sense to know what this is all about, before shopping for a mortgage? Let’s stay one step ahead of the banks, and figure this all out together.
Welcome to a series of videos that goes behind the scenes of mortgage financing, to help Canadians get approved for a mortgage they deserve. If you’re new here, and want to receive easy to understand mortgage tips, consider subscribing.
What Are GDS & TDS Ratios?
Simply put, it determines the percentage of your income that covers housing costs and debt.
It’s important that you know your own GDS and TDS ratios before applying for a mortgage or going house hunting. Why? Because 1) you want to avoid the frustration of getting your mortgage declined. And 2) this may give you some leverage to negotiate better mortgage rates and terms.
GDS (Gross Debt Service ratio)
This asks the question, “can you afford the basic monthly costs associated with owning a home?”
What do the banks consider as these basic monthly costs? These include your mortgage payment, property taxes, heating, and if applicable, half of your condo fee.
To calculate your GDS ratio. First, add up all these monthly costs. Then divide that by your gross monthly income. And finally, multiply the result by 100 to get the percentage.
GDS Calculation Example
Ok, we need an example! Let’s say you need a mortgage of $500,000. What’s the monthly payment? Well, that will, of course, depend on the interest rate you get. But more importantly, it will depend on the stress test rate. What’s a stress test?! I created a video to explain what it is, and how it affects your ability to borrow. You’ll want to check out the link below.
For now, we’re going to use 4.79% as our stress test rate. So back to our example, the monthly payment for $500,000 is $2,848.
Moving on, we’ll use a total gross annual household income of $130,000, or $10,833/month. Next, we’ll say the property tax is $250 per month, heating is $150 per month, and no condo fee. So, here’s the formula again, and we plug in all the numbers. $2,848+250+150, divided by 10,833. We get 29.99%. Let’s round it up to an even 30%.
GDS Standard Below 32%
30% is below the industry standard of 32%. In other words, for every dollar you earn, no more than 32 cents should go to paying the mortgage, property taxes, heating, and half of the condo fees. So in this example, we’re on our way to getting approved! But we’re not done yet!
TDS (Total Debt Service Ratio)
Now onto TDS, or the Total Debt Service ratio. This asks the question, “if you buy a house, can you still afford to make all your monthly debt payments?”
To calculate your TDS ratio, we take everything we calculated for GDS, and add all your monthly debt obligations. Not the total debt, just the minimum monthly payments. So this can be for credit cards or lines of credit, car loans, student loans, child or spousal support, etc.
TDS Calculation Example
Using the same example, let’s say all our monthly payments add up to $500. We plug that into the TDS equation and get 34.6%.
TDS Standard Below 40%
34.6% is below the industry standard of 40%. So what the bank is saying is that: for every dollar you earn, no more than 40 cents should go towards housing costs and debt. Fortunately in this example, we’ve passed both the GDS and TDS tests, so we’re one step closer to getting approved for a mortgage.
Now the maximum GDS/TDS of 32% and 40%, respectively, are just the current standards. Keep in mind, different banks and lenders may have higher limits, so use this as a guideline only.
By the way, calculating this by hand can be a little tedious. To help you out, I’ve created this video. It’s a quick tutorial on how to use my online calculator. It’ll also show you exactly how much home you can afford. Go check it out here:
Have any questions? Then please contact us.
Navigating all these mortgage rules can be complicated, but I’m here to help! Book your free discovery call and we’ll figure it out together.