Gross Debt Service (GDS) and Total Debt Service (TDS) are ratios that banks and mortgage brokers will calculate to determine if you are financially able to afford the mortgage you are applying for.
Gross Debt Service is the percentage of your gross income that is required to cover housing costs. Your GDS should not be higher than 32%.
These costs include:
- mortgage payment
- property taxes
- heating expenses
- condo fees (50%)
As an example, if you had a gross monthly income of $4,500 and were applying for a mortgage, the bank would look at the $1,000 mortgage payment, $200 property taxes and $150 heating expenses. This $1,350 divided by $4,500 is 30%.
Total Debt Service is the percentage of your gross income that is required to cover housing costs and any other debt. Your TDS should not be higher than 40%.
These costs could include:
- credit card payment
- credit line payment
- car loan payment
Continuing with the example above, if you add a $100 credit line payment and a $300 car payment to the $1,350 housing costs, the bank would calculate $1,750 divided by $4,500. The TDS would be 39%.
Knowing these two ratios can help you calculate how much mortgage you can afford. While these are the maximum amounts, your budget would always benefit from having lower debts and housing costs.
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Tom Drake is the owner and head writer of Canadian Finance Blog.
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Great post. Interestingly enough, during the credit bubble banks were lending on TDS pushing 42%-45%. I suspect that has gone back down to prudent lending practices.
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Does “gross monthly income” mean before taxes or does it mean take-home pay?
Just curious, but is there any difference between the Total Debt Service ratio and the Debt to Income ratio?
If the same, could it be just a difference in nomenclature between U.S. and Canadian finance industries?
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Using these two ratios is a good strategy for banks as it calculates how much debt will be taken out of a person account and work and show how much they have to live off each month which if it turn out is not a lot then offering a mortgage is a bad idea because they customer will get into other debts just to survive.
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[...] WOW – that’s a LOT to think about and account for! Now it starts to make sense in terms of why your lender caps your debt-servicing ratios at specific ranges! To learn more about debt-servicing ratios, click here. [...]
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This is the most concise and clear explanation of GDS and TDS that I’ve seen or heard. As a real estate agent I’m book-marking this page to share with my clients who are looking to buy a home and get pre-approved for financing. This will help clients understand what the mortgage broker is looking for and what is affordable for them.
I received a credit card debt consolidation loan from BMO in July 2010 and their Debt to Income (Gross) Ratio is 36%. That includes all housing costs plus additional fixed monthly expenses that were not mentioned in the blog e.g. spousal and child support, wage garnishments, student loan payments and minimal monthly credit card payments.