Gross Debt Service and Total Debt Service ratios are the two primary calculations lenders use during the loan application process. Together, these ratios play an integral role in determining your ability to qualify for a mortgage and how much home you can afford.
Here’s what you need to know:
Your GDS ratio refers to the percentage of your annual income needed to cover monthly housing costs – specifically your mortgage payment (principal and interest) as well as taxes, condo fees (50%, if applicable) and heating. As per the Canada Mortgage and Housing Corporation (CMHC), this percentage should be no higher than 35% when applying for a mortgage loan.
How to Calculate Your GDS Ratio:
Your GDS ratio is the sum of your monthly housing costs divided by your gross monthly income:
Mortgage + Taxes + Heat (+ Condo Fees) / Gross Monthly Income = GDS Ratio
For example, a home buyer who grosses $6,000 a month applying for a home with a monthly payment of $1,750 ($1,250 mortgage + $250 in taxes + $250 heating costs) will have a GDS ratio of 29%.
Your TDS ratio refers to the percentage of your annual income needed to cover monthly housing costs AND your current debt(s). Like GDS, this will include your mortgage payment, taxes, heating costs and condo fees but also factors in any car loans, lines of credit, credit cards, student loans etc. According to the CMHC, this percentage should be no higher than 40% when applying for a mortgage.
How to Calculate Your TDS Ratio:
Your TDS ratio is the sum of your monthly housing costs divided by your gross monthly income:
Mortgage + Taxes + Heat (+ Condo Fees) + Debt Load / Gross Monthly Income
For example, the same home buyer above with a monthly debt load of $600 ($100 credit card, $200 student loan and $300 car payment) will have a TDS ratio of 39%.
How to Improve Your Debt Service Ratios
Even if your ratios are higher than the industry standard, you may still qualify for a mortgage depending on the lender. But, because you’re likely to pay a higher interest rate as a result, we recommend reducing your ratios before the application process. Here are a few tips to help get you started:
- Avoid taking on additional debt
- Pay with cash as often as possible
- Transfer credit card balance to a lower-interest credit card
- Concentrate on your largest debt first (or highest interest rate)
- Boost your income (i.e. overtime, part-time job etc.)
- Pay more than the monthly minimum
- Consolidate your debts
For more helpful mortgage and finance related info, see our previous posts:
Fixed-Rate vs. Variable Mortgages: Which is Right for Me?
Or, learn more about common mortgage mistakes (and how to avoid them) by downloading your free copy of our guide The Top 20 Mistakes Home Buyers Make
Posted by Terry Paranych on