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15 Jul

Mortgage Debt Ratios: Basics of GDS & TDS

Mortgage Tips

Posted by: Michael Greene

How are GDS and TDS calculated?

You may use a mortgage calculator to determine your qualification when applying for a mortgage, it will give you have an idea of where your GDS/TDS mortgage debt ratios line up. But when applying for a mortgage first step, lenders will use the “Five C” rule when analyzing someone’s ability to afford that mortgage:

1) Capacity to repay (your income)
2) Current economic conditions (your profession’s current economic status as well as your city and country’s economic situation)
3) Capital put down (the down payment you provide, which is the amount of equity you’re offering to secure the asset)
4) Collateral (what the home is worth)
5) Character (your history of paying off debts, otherwise known as your credit history)

The second step is to qualify for a mortgage, so lenders will examine two ratios:

# 1. The GDS: Gross Debt Service is the percentage of the borrower’s income that is needed to pay all required monthly housing costs (mortgage payments, property taxes, heat and 50% of condo fees).

# 2. The TDS: Total Debt Service is the percentage of the borrower’s income that is needed to cover housing costs (GDS) plus any other monthly obligations that an individual has, such as credit card payments and car payments.

Keep in mind, however, that these ratios are used by lenders to assess your debt load potential—it should not be used as a way to determine if your debt load is manageable. That’s because these debt ratios do not take into consideration everyday expenses. So, even if you are comfortably under the 32% GDS threshold or the 40% TDS threshold when it comes to mortgage, property taxes and heating costs, you may still struggle to cover your various monthly expenses.

For both GDS and TDS calculations, you could add up your monthly housing expenses/all of your monthly debts and multiply by 12 to get the total amount for the year, and then divide that number by your annual salary. Multiply that figure by 100 to get your GDS/TDS ratio.

Let’s look at some scenarios:

Tom and Anna want to buy a house. Their combined annual salary is 88,000, which makes their gross monthly income of $7,333. They estimate that their mortgage payment and property taxes will be $2,250, heat will be $75, and they’re making $250 in credit card payments a month, with $375 in car loans.

GDS: $2,325 / $7,333 = .31 x 100 = 31 per cent

TDS:  $2,950 / $7,333 = .40 x 100 = 40 per cent

Sam wants to buy a condominium. With an annual salary of $65,000, his gross monthly income is $5,417. He estimates that the mortgage payment on his home will be $1,650, his monthly bill for his property taxes will be $125, heat is $35, and condo fees are $500. He also has a student loan payment of $550.

GDS: $2,060 / $5,417 = .38 x 100 = 38 per cent

TDS: $2,610 / $5,417 = .48 x 100 = 48 per cent

As you can see, Tom and Anna are within the GDS/ TDS standards. Both of Sam’s ratios are too high according to industry standards.

Your GDS and TDS figures don’t tell the whole story – they don’t take other basic expenses into account like transportation or food. So you want the ratios to be as low as possible to leave room for all of your other incidentals. Using a Mortgage Qualifier Calculator to figure out how much mortgage you can actually afford will help you keep an eye on the bigger picture.

If you need assistance, reach out to your local Dominion Lending Centres professional for a free consultation.