Debt Service Ratios Explained: Can You Afford That Mortgage?
Hi, WealthTrack founder David Pipe here. When it comes to qualifying for a mortgage in Canada, your income alone isn’t enough to determine how much you can borrow. Lenders use something called debt service ratios—specifically the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio—to measure whether you can comfortably handle your housing costs along with your other financial obligations.
If you’ve ever wondered why you were approved for a certain mortgage amount (or turned down for another), these ratios hold the answer. Let’s break down what they mean, how they’re calculated, and how you can use them to figure out the maximum mortgage you can realistically afford.
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What Are Debt Service Ratios?
Debt service ratios are simply percentages that compare your monthly housing costs and debt payments to your gross monthly income.
Gross Debt Service (GDS) ratio → measures only your housing costs (mortgage payments, property taxes, heating, and half of condo fees if applicable).
Total Debt Service (TDS) ratio → includes everything in the GDS, plus any other monthly debt obligations like car loans, credit cards, lines of credit, or student loans.
By setting limits on these ratios, lenders ensure borrowers aren’t taking on more debt than they can reasonably handle. It’s a safeguard for both the bank and the homebuyer.
Why Do Lenders Use GDS and TDS?
Lenders want to minimize the risk of defaults. If too much of your income is already tied up in debt, there’s less room for emergencies, interest rate changes, or unexpected expenses.
Debt service ratios provide a quick snapshot of your financial breathing room. If your ratios fall within the allowable limits, lenders see you as a lower-risk borrower. If they’re too high, your mortgage application might be denied or reduced to a smaller amount.
The Standard Debt Service Ratio Limits in Canada
While exact numbers can vary slightly depending on the lender, here are the general guidelines set by the Canada Mortgage and Housing Corporation (CMHC):
GDS ratio: should not exceed 39% of your gross monthly income.
TDS ratio: should not exceed 44% of your gross monthly income.
These limits apply especially if your mortgage is insured (less than 20% down payment). Some lenders may be stricter or slightly more flexible if you have strong credit, but 39/44 is the rule of thumb.
How to Calculate GDS and TDS
Let’s look at how these ratios are actually calculated.
Formula for GDS Ratio
GDS=(Mortgage Payment+Property Taxes+Heating+50% of Condo Fees)Gross Monthly Income×100GDS = \frac{(Mortgage\ Payment + Property\ Taxes + Heating + 50\%\ of\ Condo\ Fees)}{Gross\ Monthly\ Income} \times 100GDS=Gross Monthly Income(Mortgage Payment+Property Taxes+Heating+50% of Condo Fees)×100
Formula for TDS Ratio
TDS=(Mortgage Payment+Property Taxes+Heating+50% of Condo Fees+Other Monthly Debt Payments)Gross Monthly Income×100TDS = \frac{(Mortgage\ Payment + Property\ Taxes + Heating + 50\%\ of\ Condo\ Fees + Other\ Monthly\ Debt\ Payments)}{Gross\ Monthly\ Income} \times 100TDS=Gross Monthly Income(Mortgage Payment+Property Taxes+Heating+50% of Condo Fees+Other Monthly Debt Payments)×100
Example Calculation
Let’s imagine you earn $7,000 gross income per month and are considering a mortgage with the following costs:
Mortgage payment: $2,200
Property taxes: $300
Heating: $150
Condo fees: $200 (so $100 counted toward GDS/TDS)
Other debts: $400 car loan + $200 credit card minimums = $600
Step 1: Check Your GDS
The Gross Debt Service (GDS) ratio measures how much of your income goes toward housing costs—things like your mortgage payment, property taxes, heating, and condo fees.
For example, if your monthly housing costs are around $2,750 and your gross income is $7,000, your GDS is slightly above the recommended 39% limit. Being over that threshold could make some lenders hesitant.
Instead of doing the math yourself, use our GDS/TDS calculator. Just enter your income and housing costs, and it will instantly show whether you’re within the recommended range.
Step 2: Check Your TDS
The Total Debt Service (TDS) ratio includes everything in the GDS, plus any other monthly debts like car loans, credit cards, or lines of credit.
Continuing the example, if your other debts add up to $600 per month, your TDS would be above the 44% limit. That means a lender might reduce the mortgage you qualify for, or suggest you pay down some debts first.
With our calculator, you can enter all your debts and housing costs, and it will automatically show your TDS. This makes it easy to see whether you’re on track or need to make adjustments before applying.
How GDS and TDS Affect Mortgage Affordability
This example shows how the debt service ratios directly impact your maximum home price. Even if your income looks strong, carrying too much other debt can shrink the size of mortgage you qualify for.
That’s why mortgage brokers often advise clients to pay down debts before applying for a mortgage—it can significantly improve your TDS ratio and increase your borrowing capacity.
Strategies to Improve Your Ratios
If your GDS or TDS is too high, here are some ways to bring them down:
Pay off high-interest debts → Reducing credit card balances or loans lowers your TDS quickly.
Increase your down payment → A smaller mortgage reduces your housing costs, improving GDS and TDS.
Choose a longer amortization → Stretching your payments over 30 years (if available) lowers your monthly payment, which helps ratios.
Increase your income → Easier said than done, but some lenders allow you to include part-time income, rental income, or bonuses.
Shop around → Different lenders may interpret debt obligations slightly differently, especially if your ratios are borderline.
Debt Service Ratios and Stress Tests
It’s important to note that when lenders calculate your ratios, they don’t use the rate you actually get from the bank. They use the mortgage stress test rate—either the Bank of Canada’s benchmark (currently 5.25%) or your contract rate plus 2%, whichever is higher.
This means your ratios need to fit within the limits even under a higher “what if” rate, ensuring you can still afford payments if rates rise.
Using a Debt Service Ratio Calculator
Doing these calculations by hand can be tedious. A Debt Service Ratio Calculator simplifies the process: you just plug in your income, expected mortgage payment, taxes, heating costs, and other debts, and it instantly shows your GDS and TDS percentages.
This is especially useful if you’re:
Comparing different property price points
Wondering how paying off a loan would affect your ratios
Checking if you’re close to qualifying before talking to a lender
Why This Matters for Homebuyers
Understanding your debt service ratios empowers you to:
Set realistic expectations before house hunting
Avoid disappointment when applying for a mortgage
Plan ahead to pay down debt or increase savings to qualify for a larger mortgage
By knowing how lenders view your finances, you can make smarter decisions and improve your chances of approval.
Final Thoughts
Debt service ratios may sound technical, but they boil down to a simple question: “Can you truly afford the mortgage you’re applying for?”
The GDS ratio focuses on your housing costs, while the TDS ratio looks at your housing plus all other debts. Staying within the 39% and 44% limits is key to mortgage approval in Canada.
If you want to see where you stand right now, try using a Debt Service Ratio Calculator. It’s a quick way to find out whether your income and debts support the mortgage you’re aiming for—or whether you need to make some adjustments first.
By understanding and managing your GDS and TDS, you’ll not only improve your chances of getting approved, but also set yourself up for a healthier financial future as a homeowner.
