Debt Service Ratio - GDS and TDS Calculator
This Page’s Content Was Last Updated: November 28, 2024
What You Should Know
- Debt service ratios measure your income and set against it your housing costs and debt payments.
- High debt service ratios are bad, while low debt service ratios are good if you are looking for a mortgage.
- There are two main types of debt service ratios: Gross Debt Service or GDS, which only considers your housing costs, and Total Debt Service (TDS), which also factors in your debt payments.
- The Canada Mortgage and Housing Corporate (CMHC) has a limit of 39% for GDS and 44% for TDS. These are the maximum limits set to ensure your mortgage is affordable.
GDS and TDS Calculator
Your Debt Ratio Results ›
(GDS)
0%
(TDS)
0%
About Debt Service Ratios
Debt service ratios measure how much of your income will be eaten up by debt and other fixed payments.
Knowing your debt service ratio is essential when applying for an insured mortgage because the CMHC has recommended maximum limits for these ratios. If your debt service ratio exceeds the allowed limit, you might struggle to qualify for a mortgage.
When applying for a mortgage at a major bank, your income will also be stress tested to see if you can continue to afford your mortgage payments should interest rates rise. A mortgage stress test will also use your debt service ratios.
Gross Debt Service Ratio (GDS)
The Gross Debt Service (GDS) ratio is your housing costs expressed as a percentage of your income. It is also called the housing expense ratio.
Housing costs 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 or homeowners’ association fees. Only half is included for your HOA or condominium fee, while the full amount is included for your site or ground rent.
To calculate your GDS ratio, you must know how much your mortgage payments will be. GDS is all your total debt repayments even though you don’t yet have the mortgage. You can find out the monthly repayments by using a mortgage calculator.
If you plan to take out a high-ratio mortgage, you must include CMHC insurance premiums in your calculation. You can also use a property tax calculator to estimate your monthly property tax payments. Once you have these figures, 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.
Gross Debt Service Ratio (GDS) Calculation 💡
Housing Costs = Mortgage Payment + Utility bills (including Heating Cost) + Property Taxes + 50% of Condo Association or HOA Fee + Site or Land Rent
CMHC GDS Ratio Limit
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 suggests to a potential lender that your housing expenses may not be affordable or sustainable.
One way to reduce your GDS ratio is to lower your mortgage payments by choosing a cheaper property requiring less borrowing or selecting a longer amortization. The third option is to increase your income, but this is not necessarily a quick fix.
Total Debt Service Ratio (TDS)
Total Debt Service (TDS) is a generalized version of GDS. It includes debt payments and housing costs as a percentage of your income. Additional debts used in the TDS calculation include payments for credit card debt, line of credit installments, car loans or lease agreements, and bank 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. Here’s an example.
If you have an outstanding balance of $1,000 on your credit card and unsecured LOCs, the monthly payment would be at least $30 (plus interest) when calculating your TDS ratio, even if your 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 your monthly debt payments. Combine this with your monthly housing costs, then divide by your monthly gross income before tax. The result is your TDS ratio.
Total Debt Service Ratio (TDS) Calculation 💡
Housing Costs = Mortgage Payment + Utility bills (including Heating Cost) + Property Taxes + 50% of Condo Association or HOA Fee + Site or Land Rent
Frequently Asked Questions (FAQ)
What happens if I’m over the debt service ratio limits?
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 varying qualifying criteria. For example, some mortgage lenders allow certain types of non-employment income (like Canada Child Benefit) 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, with a GDS limit of 39% and a TDS limit of 44%.
Maximum Debt Service Ratios by Mortgage Insurer
39%
39%
39%
What counts as income when calculating your debt service coverage ratio?
Employment is the first and obvious income line. You will need at least two years of history for variable income, such as self-employment, investment income, overtime, or bonus payments. Other variable income types include commission payments and part-time income with non-guaranteed or zero-hours. You can also count rental income and pension income. You cannot use Social Assistance payments and employment insurance (EI) unless you have received these payments consistently for some time, and they are expected to continue.
Can I use rental income when applying for a mortgage?
The CMHC allows rental income to count towards gross income, but only if you are applying for a mortgage on a property other than the rental property providing that income. If you are applying for a mortgage on an investment rental property, CMHC only allows 50% of the gross rental income from that property to count towards your gross income. Taxes and heating costs are not included in your housing cost calculation. If it is a two-unit owner-occupied property, which means that you are living in a property you also rent out, 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 considers 100% of the gross rental income if your credit score is above 680. Otherwise, only 50% can be used. The rental income should be based on a two-year average from lease agreements or on fair market rent for new units.
Where do I find the amount of my heating costs?
You can use past utility bills (as long as they are recent) or a builder’s estimate. For example, CMLS estimates heating costs as the greater of $100 per month or $0.75 per square foot per year.
Debt Service Coverage Ratio (DSCR)
The Debt Service Coverage Ratio (DSCR) can assess a corporation’s financial resilience, which contrasts with the GDS and TDS ratios used in the mortgage underwriting process for individuals, 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 the inverse of the TDS ratio. For an individual, the lower the TDS ratio, the better; 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
Disclaimer:
Any analysis or commentary reflects the opinions of https://thelocalbroker.ca/ analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
The calculators and content on this page are for general information only. https://thelocalbroker.ca/ does not guarantee accuracy and is not responsible for any consequences of using the calculator.
Financial institutions and brokerages may compensate us for connecting customers to them through payments for advertisements, clicks, and leads.
Interest rates are sourced from financial institutions’ websites or provided to us directly. Real estate data is sourced from the Canadian Real Estate Association (CREA) and regional boards’ websites and documents.