The two main debt service ratios are the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios. These ratios are also called debt service coverage ratios, since it measures how much your income can cover your debt and other payments. Knowing your debt service ratios are important when applying for an insured mortgage since the CMHC has recommended maximum limits for these ratios. If your debt service ratio is over the allowed limit, you may find it harder to qualify for a mortgage.
Gross Debt Service (GDS) is your housing costs as a percentage of your income. Monthly housing costs used in the GDS calculation include your monthly mortgage payment, property taxes, heating costs, half of your condo fee, and other applicable rental fees or homeowners’ association fees. For your HOA 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. 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 to get your total GDS Ratio Cost.
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.
CMHC’s recommended maximum limit for the GDS ratio is 35%. If your GDS ratio is over 35%, 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 looking for a cheaper home instead. Alternatively, you can try increasing your income.
Total Debt Service (TDS) is similar to GDS, but it adds debt payments in addition to your housing costs as a percentage of your income. These additional debt payments used in the TDS calculation include payments for credit cards, line of credits, car loans or leases, and other loans. You can use a loan calculator to estimate your payments.
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. 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 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 42%. If your TDS ratio is over 42%, 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 to be considered in your debt ratio calculations.
You might also want to consider alternative private mortgage insurers. Sagen (Genworth Canada) and Canada Guaranty both have higher limits, with GDS at 39% and TDS at 44%.
|Gross Debt Service (GDS)||Total Debt Service (TDS)|
These income sources can be used when calculating your debt service ratios:
The following income sources cannot be used:
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.