TDS? GDS? What Is Income Debt Servicing?
Erik Sepper • October 21, 2020
“Debt servicing” is the measure of your ability to meet all of your financial obligations. There are two ratios that are examined by financial institutions to determine whether you can debt service a mortgage. The first one is called the “gross debt service” ratio (GDS) and the second is called the “total debt service” ratio (TDS).
When a lender is looking at your GDS, they add together all of your expenses in relation to the property you are purchasing - including your proposed annual mortgage payments, heating, property taxes, and a percentage of your condo fees (if applicable). When you combine all of these monthly payments and divide it by your total monthly income, this forms your GDS. Generally speaking, your GDS should not exceed 35%, but those who have exceptional credit, the allowed GDS ratio can increase to as high as 39%.
Your lender will also examine your total debt service ratio. This time, they will take your property expenses and add it to all of your other financial obligations (such as your credit cards, loan payments, outstanding lines of credit, support payments, etc.). After all the obligations are added up, they are again divided by your monthly income. Generally, this ratio should not exceed 40%. For those who have exceptional credit and/or income and assets, the allowable TDS ratios can increase as high as 45%.
Let's use an example to show this in practice. Bob and Sue are currently looking at purchasing a particular property that they want to make their new home. After running some numbers, their proposed housing expenses will include a $1500 monthly mortgage payment, $200 in property taxes ($2400/year), and no condo fees. Their total household income is $90,000 annually, which comes to $7500/month. $1700 divided by $7500 equals 0.227, or 22.7%. In this case, they come well under the required 35% GDS.
Now we will figure out their TDS. Let’s say Bob and Sue have a monthly car payment of $300. Bob also has child and spousal support payments, totalling $500 each month. Their credit cards and lines of credit amounts to a financial obligation $700 each month. These payments add up to $1500 each month, and after we add in the $1700 of housing expenses, we arrive at a total of $3200/month for all of their financial obligations. $3200 divided by $7500 equals 0.427, or 42.7%.
All of this information from Bob and Sue is very helpful for the lender, and if you understand it, it can be helpful for you too. Based on their GDS alone, Bob and Sue can easily afford the house they are considering. But factor in their other expenses and the picture is not as clear - the lender will likely look at their credit score next to determine if they can afford the property, or if they should set their sights a little lower due to being a credit risk.
Put another way, if Bob and Sue were able to drastically decrease their balances on their credit cards and line of credit, they would likely qualify for a more expensive home if they so desired.
If you're in a situation where you are questioning what you can afford, or want to discuss your personal GDS and TDS ratios in an effort to more clearly understand the financing process, contact me anytime, I would love to work with you.
The Bank of Canada announced today that it is maintaining its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%. For Canadian homeowners, buyers, and anyone with a mortgage on the horizon — here's what you need to know.
You’ve found the right home, your offer’s been accepted, and your financing is approved—congratulations! But before you can pick up the keys and celebrate, there’s one more important stage: the closing process. Closing is the final step in your homebuying journey, where all the paperwork, legal details, and financial transactions come together. It can feel overwhelming if you don’t know what to expect, but with the right preparation, closing can be smooth and stress-free. Here’s a step-by-step guide to help you understand the process. Step 1: Hire a Lawyer or Notary A real estate lawyer (or notary, depending on your province) handles the legal side of closing. They will: Review the purchase agreement and mortgage documents Conduct a title search to confirm the seller has the legal right to sell the property Ensure the mortgage lender is properly registered on the title Handle the transfer of funds between you, the lender, and the seller Your lawyer or notary will be your main point of contact during closing, so choose one you trust and who communicates clearly. Step 2: Finalize Your Mortgage Your lender will send the mortgage instructions directly to your lawyer or notary. At this stage: You’ll provide proof of property insurance (lenders require this before releasing funds) You’ll confirm your down payment and closing costs are available in your lawyer’s trust account The lawyer will prepare all documents for your review and signature Step 3: Pay Closing Costs Closing costs typically range from 1.5% to 4% of the purchase price. These can include: Legal fees Title insurance Land transfer tax (where applicable) Adjustments for property taxes or utilities prepaid by the seller Home inspection or appraisal fees (if not already paid) Your lawyer will provide a final statement of adjustments so you know exactly how much is due on closing day. Step 4: Sign the Paperwork A few days before closing, you’ll meet with your lawyer or notary to sign all the necessary documents, including: Mortgage agreement Title transfer Insurance confirmations Statement of adjustments Bring valid government-issued ID to this appointment. Step 5: Transfer of Funds On the day of closing: Your lender sends the mortgage funds to your lawyer Your lawyer combines these funds with your down payment and pays the seller Legal ownership of the property is transferred into your name The lender is registered on title as a secured creditor Step 6: Get the Keys! Once the paperwork is filed and the funds have cleared, your lawyer will confirm that the transaction is complete. You’ll then get the keys to your new home—officially making it yours. The Bottom Line The closing process is a series of important steps, but with the right team in place, it doesn’t have to be stressful. By working closely with your mortgage professional and lawyer, you’ll have guidance every step of the way—from signing the documents to turning the key in the front door. If you’d like help preparing for the closing process—or want a clear breakdown of your own closing costs— connect with us today.
Buying a home is one of the biggest financial commitments you’ll ever make. That’s why lenders want to be sure you can handle your mortgage payments—not just today, but also if interest rates rise in the future. This is where the mortgage stress test comes in. Many Canadians hear the term but aren’t entirely sure what it means or how it affects them. Let’s break it down in plain language. What Is the Mortgage Stress Test? The stress test is a rule introduced by the federal government that requires all mortgage applicants to qualify at a higher rate than the one they’ll actually pay. Currently, you must qualify at the greater of your contract rate + 2% or the benchmark qualifying rate (set by the Office of the Superintendent of Financial Institutions). For example: If your lender offers you a 5-year fixed mortgage at 5.25%, you must show you could still afford the payments at 7.25% . Even if rates don’t rise that high, the stress test ensures you won’t be overextended if they do. Why Does It Matter? The stress test protects both borrowers and lenders by: Preventing over-borrowing : It ensures you don’t take on more debt than you can realistically handle. Preparing for rate hikes : With interest rates fluctuating, it’s a safeguard against sudden increases. Strengthening financial stability : It lowers the risk of defaults, protecting the housing market as a whole. While it can sometimes feel like a barrier—reducing the amount you qualify for—it’s ultimately designed to keep you from becoming “house poor.” How Does It Impact Buyers? The stress test can significantly affect your homebuying budget. For example, without it, you might qualify for a $600,000 mortgage, but with the stress test applied, you may only qualify for $500,000. That doesn’t mean your dream of homeownership is out of reach—it just means you may need to adjust expectations or explore other strategies, such as: Increasing your down payment Paying down existing debts Considering alternative lenders who may have different qualification standards Why Work With a Mortgage Professional? Every lender applies the stress test, but not every lender views your application the same way. An independent mortgage professional can: Shop multiple lenders to find the best fit Run affordability scenarios at different rates Help you understand how much house you can truly afford—without stretching your finances too thin The Bottom Line The mortgage stress test isn’t meant to stop you from buying a home—it’s there to protect you from financial strain down the road. By understanding how it works and planning ahead, you can make smarter choices and buy with confidence. If you’re thinking about purchasing a home, refinancing, or simply want to know how the stress test affects your options, connect with us today. We’ll help you stress-test your budget and find the mortgage solution that works best for you.