Debt Service Ratio - GDS and TDS Calculator

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Gross Debt Service (GDS) ratio is your housing costs as a percentage of your income. It is also called the housing expense ratio. Monthly housing costs used in the GDS calculation include your monthly mortgage payment, property taxes, utility bills (including heating costs), half of your condo fee, and other applicable rental fees or homeowners’ association fees. For your HOA or condominium fee, only half is included, while the full amount is included for your site rent or ground rent.

To calculate your GDS ratio, you will need to know how much your mortgage payments will be. You can find out this amount by using a mortgage calculator. If you are planning to take out a high ratio mortgage, you will need to include CMHC insurance premiums in your calculation. You can also use a property tax calculator to estimate your monthly property tax payments. Then, add all of your housing costs together.

Next, divide your monthly housing costs by your monthly gross income. Gross income is your income before any income taxes or deductions. The result is your GDS ratio or housing expense ratio.

CMHC’s maximum acceptable limit for the GDS ratio is 39%. If your GDS ratio is over 39%, it may indicate that your housing expenses are too high compared to your income. A high GDS ratio might mean that your housing expenses are not affordable or sustainable. You can lower your mortgage payments to reduce your GDS ratio, which might mean choosing a longer amortization or looking for a cheaper home instead. Alternatively, you can try increasing your income.

Total Debt Service (TDS) is a generalized version of GDS. It includes debt payments in addition to your housing costs as a percentage of your income. Additional debt payments used in the TDS calculation include payments for credit card debt, line of credit debt, car loans or leases, and other loans.

The CMHC considers your credit card and unsecured line of credit monthly payments as the greater of the actual minimum payment or a minimum of 3% of the outstanding balance plus interest. For example, if you have an outstanding balance of $1,000 on your credit card and unsecured LOCs, then you would use at least $30 (plus interest) as your monthly payment when calculating your TDS ratio, even if your actual minimum payment is lower.

CMHC also considers secured lines of credit to be amortized over 25 years when calculating its monthly payment amount.

To calculate your TDS ratio, add up all of your monthly debt payments. Combine this with your monthly housing costs, then divide by your monthly gross income. The result is your TDS ratio.

The CMHC’s recommended maximum limit for the TDS ratio is 44%. If your TDS ratio is over 44%, it might suggest that your housing costs or debt payments are too high. You can lower your TDS ratio by paying off debt, increasing your income, or by lowering your housing costs. The latter could be achieved by looking for a less expensive home or by making a larger down payment.

Being slightly over the debt service ratio limits doesn’t mean that you won’t be able to qualify for a mortgage. Different mortgage lenders have different mortgage qualifications. For example, some mortgage lenders might allow some types of non-employment income (like Canada Child Benefit) to be considered in your debt ratio calculations.

You might also want to consider alternative private mortgage insurers. Sagen (Genworth Canada) and Canada Guaranty are private mortgage insurance providers active in Canada, also with GDS limit at 39% and TDS limit at 44%.

Maximum Debt Service Ratios by Mortgage Insurer

These income sources can be used when calculating your debt service ratios:

• Employment Income
• Variable Income with a minimum two-year history (self-employed income, investment income, overtime, bonus, commission income, and part-time income with non-guaranteed hours)
• Pension Income
• Rental Income

The following income sources cannot be used:

• Employment Insurance (EI)
• Social Assistance payments

Lenders want to see that your income source is steady and is expected to continue in the future. This means that EI and social assistance payments might still be used if they have been consistent for some time and are expected to continue.

The CMHC allows your net rental income to be used when calculating your gross income if you are not applying for a mortgage for the rental property that you are earning rental income from.

If you are applying for a mortgage on an investment rental property, CMHC only allows 50% of your gross rental income from that property to be used towards your gross income. Taxes and heating costs would not be included in your housing cost calculation. If it is a two-unit owner-occupied property, which means that you are living in the property that you are also renting out, then you can apply 100% of the gross rental income as your gross income.

Alternative private mortgage insurers may have different policies. For example, Sagen (Genworth) only allows 100% of the gross rental income to be considered if your credit score is above 680. Otherwise, only 50% can be used. The rental income that you can use should be based on either a two-year average from lease agreements, or on fair market rent for new units.

This could be from a builder's estimate or from a utility bill. For example, CMLS estimates heating costs as the greater of $100 per month or $0.75 per square foot per year.

A related concept is debt service coverage ratio (DSCR). While GDS and TDS ratios are often used in the underwritting of a mortgage for an individual, DSCR is often used to judge the financial strength of a corporation.

EBITDA stands for earnings before interest, taxes, depreciation and amortization. Consider that gross income is effectively an individual's EBITDA. So conceptually, we can think of DSCR as inverse of TDS ratio.

For an individual, the lower the TDS ratio the better, while for a corporation the larger the DSCR the better. Any bank can feel safe offering a commercial loan where DSCR is greater than 1.4. An aggressive bank might extend a loan with a DSCR as low as 1.15