How Do GDS & TDS Affect Mortgage Qualification?

Darcy DoyleMortgage Tips


You’ve likely only come across ‘GDS and TDS ratios’ if you’ve previously applied for a mortgage. These calculations are used to determine what you can afford to pay towards homeownership costs based on your current income and debt levels.

GDS – gross debt service – is the percentage of a borrower’s income that’s required to pay all monthly housing costs (principal, interest, taxes and heat).

TDS – total debt service – is the percentage of a borrower’s income that’s required to cover housing costs (GDS) plus any other monthly obligations, including payment towards credit cards, lines of credit, personal loans and vehicle loans.

Debt service ratios should typically fall below 32% for GDS and 40% for TDS. Most borrowers with good credit and reliable income will, however, be allowed to exceed these guidelines – to a maximum GDS of 39% and TDS of 44%.

If either of your ratios fall above the industry standards, you may want to save a larger down payment and/or pay off some existing debt before buying a home.

Income is key

A major component to these ratios is your income. This calculation is quite straightforward for people in salaried position or those who are guaranteed regular hours by their employer.

But for those who are self-employed, have seasonal employment, receive a portion of their income as commission, bonuses or overtime, or don’t have a guaranteed minimum number of hours, the income calculation is more complex.

In both scenarios, lenders want to see two years of employment in the same line of work. They’ll then take a two-year average to determine how much income to use on the application.

Documents required to confirm income include two years of Notices of Assessment (NOAs) for your income claimed with Revenue Canada plus a recent paystub, if applicable, showing your total year-to-date earnings for the current year.

It’s important to note – especially for self-employed individuals – that the income used for this average is the net taxable income (line 150 on your NOA) and not the gross income before deductions. While there are programs for self-employed borrowers that allow a higher income amount to be declared, there are specific rules for these programs and self-employed individuals should first consult with their mortgage professional to determine if they qualify to use a higher income than their two-year average.

In addition to considering the ratios mortgage lenders allow, it’s wise to calculate how much you think you can afford. For instance, if the monthly housing cost you’re comfortable with is less than the suggested GDS ratio, you may want to opt for a lower purchase price rather than stretch yourself financially.

Have questions about your GDS/TDS ratios? We can help you decide what you can comfortably afford. Answers are just a call or email away.