GDS and TDS ratios explained

The short answer

Canadian lenders use two ratios to decide how large a mortgage you can carry. The gross debt service (GDS) ratio measures housing costs against your gross income. The total debt service (TDS) ratio adds every other debt payment. For an insured mortgage, CMHC, Sagen and Canada Guaranty all cap GDS at 39% and TDS at 44%.

On a household income of $100,000, that means at most $3,250 a month for housing and $3,667 a month for housing plus other debts. Both are measured with the mortgage payment at the stress-test qualifying rate, not your actual rate.

The GDS and TDS formulas

GDS = (mortgage principal and interest + property tax + heating + 50% of condo fees) ÷ gross income

TDS = (everything in GDS + all other debt payments) ÷ gross income

Use monthly figures for everything, or annual figures for everything; the ratio is the same. Gross income is income before tax and deductions, for everyone on the mortgage. The mortgage payment is calculated at the qualifying rate: the greater of your contract rate plus 2 points or 5.25%. At a 4.12% rate, that is 6.12%.

What counts in each ratio

The credit card rule surprises people. A card with a $5,000 balance counts as $150 a month in TDS, even if you pay it off every month. Lenders check your credit report, so balances show up whether you list them or not.

CMHC does not set a fixed heating figure. Lenders use your actual bills if you provide them, or a reasonable estimate. Our examples use $100 a month as a placeholder.

Worked example

A household earns $100,000 ($8,333 a month) and wants a $450,000 house in Ontario with $50,000 down. Property tax is 0.75% of the price, heat is $100 a month and they pay $400 a month on a car loan. Their rate is 4.12% over 25 years, so they're tested at 6.12%. With less than 20% down, the insurance premium is added to the loan, for a mortgage of $412,400.

GDS is $3,049 ÷ $8,333 = 36.6%. TDS is $3,449 ÷ $8,333 = 41.4%. Both are inside the limits, so this price works on the ratios.

The same price as a condo

Now make it a condo with $400 a month in fees. Only 50% ($200) counts. GDS becomes 39.0%, which passes the 39% limit, and TDS becomes 43.8%, which passes the 44% limit. Condo fees can easily be the difference between approval and a lower price.

Your ratios at the rate you actually pay

The ratios a lender reports are higher than what you'll really pay. At the 4.12% contract rate, the same $412,400 mortgage costs $2,196 a month instead of $2,668. That puts this household's real GDS at about 30.9% and real TDS at about 35.7%. The gap is the stress test's safety margin: it is there in case rates are higher when you renew.

What counts as gross income

Both ratios divide by gross income: pay before income tax, CPP, EI and other deductions. That's why 39% sounds high. A household at the limit is spending a much larger share of its take-home pay on housing.

A steady salary is the simplest case: lenders use the annual amount on your employment letter and pay stubs. Hourly pay with variable hours, overtime, bonuses, commission and self-employment income are harder. Lenders usually want a track record, often checked against your Notices of Assessment, and may average it over more than one year. Rental income and support you receive can count too, under each lender's policy. If your income isn't a simple salary, ask the lender how it will count it before you rely on a number.

Which ratio limits you?

The gap between the two limits is 5 percentage points of income. For the example household that is $417 a month. If your other debt payments are less than that, GDS is the limit and those debts don't lower your maximum. Once they're above it, TDS takes over and every extra dollar of debt payment cuts what you can borrow.

Run your own numbers in the GDS/TDS calculator.

Insurer limits and lender limits

For insured mortgages (less than 20% down), the limits are set by the three mortgage insurers. CMHC, Sagen and Canada Guaranty each publish a maximum GDS of 39% and a maximum TDS of 44%. Your lender applies the insurer's limits, and may apply stricter limits of its own.

For uninsured mortgages (20% or more down), there is no single national cap. Each lender sets its own GDS and TDS limits under its own credit policy, and they may differ from 39% and 44%. The stress test still applies at federally regulated lenders, so the ratios are always measured at the qualifying rate there. Ask the lender what limits it uses.

How to lower each ratio

Lowering GDS

• Put more down. In the example, $25,000 more down raises the maximum from $477,500 to $500,300.
• Look at lower property-tax areas. A tax rate 0.25 points lower raises the example maximum to $491,500. Compare municipalities in our city guides.
• Watch condo fees and heating. Half of condo fees and all of the heating estimate come straight out of your GDS room.
• Use a longer amortization if eligible. A 30-year insured amortization is open to first-time buyers and new builds. It lowers the test payment, but costs more interest over time.
• Add a co-borrower's income. GDS is divided by the gross income of everyone on the mortgage.

Lowering TDS

• Pay down revolving balances. Each $1,000 of credit card balance counts as $30 a month.
• Pay off small loans. A household with $900 a month of debts can afford about $411,200; cutting that to $600 raises it to about $452,300.
• Hold off on new debt. A new car loan before closing can push TDS over the limit even after a pre-approval.
• Everything that lowers GDS also lowers TDS, because housing costs are part of both.

Next steps

1. List your monthly debt payments from your credit report, using 3% of any card or unsecured line of credit balance.
2. Enter them in the GDS/TDS calculator with a price, property tax and heating estimate.
3. See which ratio is limiting you, then use the levers above.
4. Check the full picture, including down payment and closing costs, in the affordability calculator.