Gross Debt Service & Total Debt service
Written by the The Calgary Mortgages .CA Crew
Have you ever wondered what lenders base their decisions on when it comes to approving or rejecting a mortgage application? The requirements can be different depending on the lender at which your loan will be approved. That being said, there are two calculations that every lender uses when detecting your affordability; they are your “GDS and TDS Ratios.”
Continue Reading: 5 min Read
What is a GDS Ratio?
GDS stands for Gross Debt Service. The Gross debt service ratio calculates your ability to purchase that specific house. If your if your mortgage requires “default mortgage insurance”, the insurers will mandate that your “GDS” cannot exceed 39%. This means that when we add the mortgage payment, property taxes, cost of heating the home and 50% of the condo fees (if applicable), and divide this number by your gross income, the ratio cannot equal more than 39%.
Note: your “Gross Income” is your income BEFORE the government deducts your taxes.
An example of a GDS Calculation:
Mortgage Payment: $1,000/month
Tax Payment: $300/month
Heat: $125/month
Condo Fees: $50/month
$1,475/month
—————————————————–
$1,475/month
x 12 months
$17,700 (Divided by annual salary of $60,000)
= 29.5% GDS
What is TDS Ratio?
TDS stands for Total Debt Service. Your Total Debt debt servicing ratio is the amount of your Gross Income (income before taxes) that is spent on paying for your total monthly debt. This ratio cannot be more than 44%. This means that we add the mortgage payment, property taxes, cost of heating the home and 50% of the condo fees (if applicable), AND your car payments, student loans, credit card payments, and anything else you might pay monthly together and then divide this number by your gross income, the ratio cannot equal more than 44%.
An example of a TDS Calculation:
Monthly GDS: $1,475/month
Car Payment: $ 300/month
Credit Card: $100/month
Unsecured Line of Credit: $250/month
$2,175/month x 12 months = $26,100
(Divided by your annual salary of $60,000)
= 43.5% TDS
What do these ratios mean?
The CMHC Guidelines require GDS and TDS ratios of 39% & 44% if you have a credit score greater than 680. However, if you do not meet the 680 standards, the ratios decrease to 35% & 42%. The other two default mortgage insurance companies in Canada, Canada Guaranty and Sagan have less strict guidelines for their borrowers.
Final Thoughts
Although calculating your GDS and TDS is a very important step in becoming prequalified for a home purchase, these ratios do not take other expenses into account. It will be important to consider how you spend your monthly income on extras such as food, entertainment, and transportation. Just because the “GDS & TDS” say that you can afford a house, it doesn’t mean that your recreational spending habits match the purchase price.
When you meet with your mortgage professional, make sure to discuss your full picture, monthly cashflow situation so that they can help you make the best decisions for your specific needs.
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