What are debt ratios—and how to calculate yours

When you’re searching for the perfect home for you, affordability is the name of the game. Especially as interest rates continue to rise, you may be asking yourself, “How do I figure out how much I can afford?” 

There are two significant factors that lenders look at when determining how much home you can afford: your gross debt service (GDS) ratio and your total debt service ratio (TDS). The good news is that you can use these calculations yourself and figure out your general affordability to get started. 

What is the gross debt service ratio? 

Your gross debt service ratio (GDS) is how much of your gross income goes towards housing costs. This calculation includes: 

• Mortgage payments 
• Property taxes
• Utility costs, like heat and hydro 
• If you live in a condo, this ratio will include 50% of your condo fees 

The general rule is to have your GDS ratio at most 39%. 

What is the total debt service ratio? 

Your total debt service ratio (TDS) is similar to your gross debt service ratio. But your TDS takes into account any other debt that you may have and adds that into the equation. This includes: 

• Auto debt 
• Child support 
• Student debt 
• Credit card payments
• Alimony
• Loans co-signed for family/friend

Lenders will typically set a limit of 44% for your TDS ratio, but being closer to 42% is much more ideal. It’s also important to note, if you’re purchasing a home with someone else, it’s possible to exceed both the TDS and GDS ratios since lenders look at combined income and debts when determining mortgage affordability. 

How do you calculate your GDS ratio? 

To calculate your GDS, you can calculate the portion of your income you would be paying each month to own the property you’re interested in. First, you can estimate how much you will be spending annually on the factors above: mortgage payments, property taxes, utility costs, and condo fees (if applicable). Add these up and divide it by your gross annual income and multiply it by 100. If your answer equals less than 39%—which, again, is ideal—your lender will feel confident that you’ll be able to pay your monthly costs, and you’ll have a high likelihood of being approved for a mortgage. 

How do you calculate your total debt service ratio? 

You can calculate your TDS by taking the same GDS calculation but adding in any other monthly payments you may have, like student loans or the minimum payment on credit card debt. 

Now, add together your mortgage payments, property taxes, heating costs, 50% of your condo fees and any debts you may have. Divide the total by your gross annual income and multiply it by 100. If your answer equals less than 44%, lenders will see you can keep up with your monthly payments and should feel confident lending you money. 

How can you calculate both GDS and TDS ratios? 

Let’s say that you want to purchase a condo for $450,000 with 5% down and a rate of 2.82%, and you make an annual income of $100,000 before taxes. With this in mind–in a hypothetical situation–if you have minimal credit card debt and only one car loan, you can stay below the TDS and GDS ratios:

• Gross monthly household income =  $8,333
• Estimated monthly heating/cooling costs = $150
• Monthly property taxes = $350
• Monthly credit card payments = $100
• Monthly car payment = $400
• Monthly mortgage payment = $2,063.20

But, keep in mind, you have to still be able to qualify with Canada’s mortgage stress test of 5.25%.

What do you do if your GDS and TDS ratio exceeds both limits? 

Be sure to keep in mind that both of these ratios are only recommendations. But you have a few options if your GDS and TDS ratio exceeds both limits. You can: 

• Pay down debt to reduce your TDS ratio
• Save for a bigger down payment to reduce how much you need to borrow 
• Reduce your budget and look for homes in a lower price range to lower your GDS and TDS ratios 
• Shop around because different lenders use different criteria when it comes to creditworthiness and getting approved for a mortgage, so you may find a lender that better suits your needs. 

Whenever you’re ready to start your home buying journey, apply with Pine today and we can help answer any and all your questions.