A Comprehensive Guide to Calculating GDS and TDS Ratios


Navigating the world of mortgages can be complex, especially when trying to understand the role of debt ratios. Your gross debt service (GDS) and total debt service (TDS) ratios are vital in determining your mortgage loan eligibility. Whether you’re a first-time homebuyer or a seasoned homeowner, a solid grasp of these concepts is essential for making informed decisions about your future budget. In this comprehensive guide, we’ll unpack GDS and TDS ratios and how they impact your mortgage. 

What is Debt Service Ratio?

When assessing your mortgage affordability, one of the most crucial factors lenders consider is your debt service ratio (DSR). The DSR is a financial metric that helps determine your ability to manage your debt based on your income. It’s a key indicator of your likelihood of making timely mortgage payments. There are two debt service ratios to understand: Gross debt service (GDS) and total debt service (TDS). Let’s break each of these down:

Gross Debt Service (GDS) Ratio

Think of the GDS ratio as a measure of how much income goes towards housing-related expenses. It considers your mortgage principal and interest payments, property taxes, heating costs, and other fees.

To calculate your GDS ratio, divide your total housing expenses by your gross income and multiply the result by 100 to get the percentage:

[Total Housing Expenses / Gross Income] x 100 = GDS

Lenders usually have a maximum GDS ratio threshold, typically around 30% to 39%. Going above this threshold might raise concerns about your ability to afford your mortgage payments.

Total Debt Service (TDS) Ratio

Unlike the GDS ratio, the TDS gives a broader picture of your debt obligations. It considers your housing expenses and other monthly payments, like credit card bills, car loans, lines of credit, and other outstanding debts.

To calculate your TDS ratio, divide your total debt payments by your gross income and multiply that result by 100:

[Total Debt Payments / Gross Income] x 100 = TDS

Just like the GDS ratio, lenders usually have a maximum threshold for the TDS ratio, typically ranging from 40% to 44%. A higher TDS ratio indicates that a larger proportion of your income goes to debt payments, which could impact your eligibility for a mortgage.

The Importance of Understanding GDS and TDS Ratios

Understanding and calculating your GDS and TDS ratios are crucial in determining how much you can afford in a mortgage. By staying within the acceptable range, you demonstrate your financial capability to handle the responsibilities of homeownership — which lenders love to see! Here are some other benefits of understanding GDS and TDS ratios:

  1. Mortgage Approval and Interest Rates: Meeting acceptable lender thresholds increases your chances of mortgage approval and may give you more bargaining power when negotiating interest rates.
  2. Financial Planning and Budgeting: By calculating these ratios, you gain insights into your current debt situation and can evaluate how your income aligns. This information can help you make informed decisions about your budget, ensuring you can meet the demands of a mortgage while maintaining financial health.
  3. Long-Term Financial Stability: Understanding GDS and TDS ratios goes beyond the immediate mortgage approval process. It equips you with the knowledge to make sound financial decisions that promote long-term stability. Keeping your ratios within manageable limits creates a solid foundation for your financial future.

Estimating Monthly Mortgage Payments

To estimate your monthly mortgage payments, you can use an online calculator. Have the following information handy: Purchase price, down payment, interest rate, and amortization period (the time it takes to pay off the loan).

When estimating your mortgage, you should keep your DSRs in mind. Ensure that your estimated mortgage payment, along with your other debt payments and housing expenses, stay within the acceptable limits of the thresholds set by lenders. This helps you maintain a healthy balance between income and debt, reducing the risk of financial difficulties.

What Happens if I Exceed the Debt Service Ratio Limits?

Exceeding your debt service ratio limits can significantly affect your mortgage application. When you surpass these limits, lenders may be concerned about your ability to manage debt while meeting your mortgage obligations. Potential consequences include:

  • Mortgage denial or lower approval amount.
  • Higher interest rates.
  • Limited mortgage options.
  • Financial strain and default risk.
  • Delayed homeownership plans — you may need to save more or pay off some current debt before purchasing a new house.

Ready to Plan For a Mortgage?

Your debt service ratios are essential benchmarks for estimating mortgage payments and ensuring financial stability. If you find it challenging to balance income and debt, that’s okay! Whether you feel overwhelmed by these calculations or just need some advice, reach out to me today. Together, we can look at your ratio levels and determine a course of action for your mortgage.

A Comprehensive Guide to Calculating GDS and TDS Ratios
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About Andrew Thake

Andrew Thake is a seasoned mortgage broker with over 15 years of industry experience. He’s assisted more than 2,200 clients in finding their ideal mortgage solutions. Recognized for his excellence, Andrew has received high honours and awards, including the National Rookie of the Year from TD Canada Trust and recognition as a Top 10 Ottawa Mortgage Broker in 2023. He has also been inducted into the Hall of Fame at Dominion Lending Centres and has consistently received their Platinum Award during his tenure as a mortgage broker.

Andrew’s dedication lies in serving his clients and prioritizing their needs with an empathetic approach. Throughout the application process, he provides tailored, informed, and efficient services to ensure the best mortgage solutions for his client’s unique circumstances. The best part of Andrew’s job is when he gets to see the joy on his clients’ faces following their mortgage approval.

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