## What are GDS and TDS? Why are They Important?

GDS and TDS are debt to income ratios. They are ratios that measure how much debt you have relative to how much income you earn. They are important because they can limit the size of the mortgage that you can qualify for.

GDS stands for Gross Debt Service. If you are applying for a mortgage, it is calculated by adding up the mortgage payment, property taxes, heating costs, and half of the condo fees (if applicable) and dividing it by your total income.

In general, your GDS cannot exceed 39%.

TDS stands for Total Debt Service. Calculating TDS is the same as calculating GDS except that, in addition to mortgage payments, taxes, heat, and half of the condo fees, it also includes all your other debt payments like car loans, credit cards, lines of credit, etc.

So TDS is calculated by adding the mortgage payment, property taxes, heating costs, half of the condo fees, credit card debts, and loan debts and dividing that amount by your total income.

In general, your TDS cannot exceed 44%.

## The Government of Canada Mortgage Stress Test

Before we perform some sample calculations, it’s important to clarify what mortgage payment is used in these calculations.

For the purposes of calculating GDS and TDS, you don’t simply use the mortgage payment that you would pay based on the rate that you would get with a lender.

The mortgage payment must be calculated at either the rate of 5.25% or the rate you can get plus 2%, whichever is higher. This is called the “stress test” and the government introduced it to address the issues that arose during the financial crisis of 2008.

The crisis occurred partly because interest rates increased and home owners were no longer able to make the mortgage payments which also increased.

So the stress test ensures that your GDS will remain below 39% and your TDS will remain below 44% even if interest rates were to eventually go up by at least 2%.

## GDS and TDS Calculators

Note that all of the below calculations were performed using my free handy dandy mobile mortgage calculator app.

Aside from calculating things like mortgage payments, the app can also calculate GDS and TDS ratios for any situation. If you’re interested in downloading the app so you can run the calculations for your own personal scenario, click here:

**Get my Free Mortgage Calculator App!**

Now let’s go through some examples to make everything clear!

## Example Scenario for GDS and TDS Calculations

Let’s say you want to apply for a $400 000 mortgage at a rate of 3% and an amortization period of 25 years.

Your actual monthly mortgage payment would be $1893. But that’s at a rate of 3%.

According to the government stress test, you have to calculate the mortgage payment by using the qualifying interest rate of either 5.25% or 5% (which is 3% + 2%), whichever is higher. In this case, the rate of 5.25% is higher.

So the qualifying mortgage payment for a $400 000 mortgage at 5.25% and an amortization period of 25 years is $2384/month. This is the mortgage payment amount that we will use in the GDS and TDS calculations below.

Let’s also estimate the following:

Property taxes: $250/month

Heating costs: $100/month

Condo fees: $200/month

Car loan: $400/month

Credit card payments: $150/month

Total gross income of all applicants: $7500/month ($90 000/year)

Now for the GDS calculation!

## Example 1: GDS Calculation

GDS = (mortgage payment + property taxes + heating costs + 50% of condo fees) / (total gross income)

GDS = ($2384 + $250 + $100 + 50% of $200) / ($7500)

GDS = 37.78%

So your GDS is under the 39% limit. So far so good!

## Example 2: TDS Calculation

TDS = (mortgage payment + property taxes + heating costs + 50% of condo fees + car loan + credit card payments) / (total gross income)

TDS = ($2384 + $250 + $100 + 50% of $200 + $400 + $150) / ($7500)

TDS = 45.12%

So your TDS is over the 44% limit.

Since you have to pass both the GDS and TDS requirements, you would not qualify for the $400 000 mortgage as it is.

## Is all Lost? Can a Mortgage Agent Help you Qualify?

But not all is lost! In this case, there are things that your mortgage agent can advise you to do so that you do qualify.

For example, they can advise you to pay off part or all of your credit card if you can.

If you can’t pay off your credit card, your mortgage agent can find you a mortgage with an amortization period of 30 years.

Both of those things would get your TDS under the 44% limit. And then you would qualify for the mortgage!

## Clarification on GDS and TDS Limits

Note that I say that “in general” your GDS has to be under 39% and your TDS has to be 44% to qualify for a mortgage.

Those limits are primarily for the big banks. Mortgage agents have access to big banks but also to lenders that will allow higher GDS and TDS ratios. After all, access to various lenders is one of the benefits of using a mortgage agent!

The calculations get a bit more complicated when you factor in self employed income, rental income, foreign income, or when you don’t know what is considered a debt, but those are the basics of GDS and TDS calculations.

If you have any questions about how to calculate GDS and TDS ratios for your own personal scenario, contact me and I’ll gladly help you out!

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