When a Canadian lender reviews your mortgage application, two ratios matter more than almost anything else: GDS and TDS. These two percentages determine how much you can borrow, whether you pass the stress test, and in many cases whether you are approved at all. This guide explains what they are, how they are calculated, and how to improve them.
What GDS and TDS mean
Gross Debt Service (GDS) ratio measures how much of your income goes to housing costs. Total Debt Service (TDS) ratio measures how much of your income goes to all debt payments combined.
Lenders use these ratios to check whether you can afford the mortgage without becoming overextended. The standard limits used by most Canadian lenders are:
- GDS: 39% or less
- TDS: 44% or less
These limits are guidelines, not absolute laws. Some lenders will approve slightly higher ratios for strong applications with excellent credit, large down payments, or significant assets. But for most borrowers, exceeding these limits means a declined application or a smaller approved mortgage.
How GDS is calculated
GDS = (Housing costs per month) / (Gross monthly income) x 100
Housing costs include:
- Mortgage principal and interest payment
- Property taxes (monthly equivalent)
- Heating costs (monthly equivalent)
- 50% of condominium fees, if the property is a condo
Gross monthly income is your income before taxes, divided by 12. For salaried employees, this is straightforward. For self-employed borrowers, lenders typically use an average of the last two years of declared income, and may apply additional verification.
Example: Your household gross income is $120,000 per year, or $10,000 per month. Your mortgage payment is $2,800, property taxes are $400 per month, heating is $150 per month, and there are no condo fees.
Housing costs = $2,800 + $400 + $150 = $3,350
GDS = $3,350 / $10,000 = 33.5%
This passes the 39% limit comfortably.
If the same household wanted a larger mortgage with a payment of $3,600, housing costs would be $4,150, and GDS would be 41.5%. That fails the 39% limit, and the lender would either decline or approve a smaller amount.
How TDS is calculated
TDS = (All debt payments per month) / (Gross monthly income) x 100
All debt payments include everything in GDS plus:
- Car loan or lease payments
- Credit card minimum monthly payments
- Line of credit payments
- Student loan payments
- Personal loan payments
- Child support or alimony payments, if applicable
- Any other regular debt obligations
Example: Using the same household above, with housing costs of $3,350, plus a car payment of $450, credit card minimums of $150, and a student loan payment of $200.
Total debt payments = $3,350 + $450 + $150 + $200 = $4,150
TDS = $4,150 / $10,000 = 41.5%
This passes the 44% limit, but with less room than GDS alone suggested. This is why paying off other debts before applying for a mortgage can significantly increase your borrowing power.
The stress test and GDS/TDS
Since 2018, the mortgage payment used in GDS and TDS calculations must be the stress-tested payment, not the actual contract payment. This is the B-20 rule.
If your contract rate is 5.25%, the lender calculates your mortgage payment at 7.25% (contract rate plus 2%) for GDS and TDS purposes, or at the Bank of Canada benchmark rate if that is higher.
This makes a large difference. On a $500,000 mortgage with 25-year amortization, the payment at 5.25% is about $2,972. At 7.25%, it is about $3,566. That $594 difference flows directly into both GDS and TDS.
Using the earlier example: at the contract rate, GDS was 33.5% and TDS was 41.5%. At the stress test rate, the mortgage payment rises to $3,566, housing costs become $4,116, and GDS becomes 41.2% — which fails the 39% limit. Total debt payments become $4,916, and TDS becomes 49.2% — which fails the 44% limit.
The same household, the same home, but the stress test changes both ratios from pass to fail. This is the single biggest reason buyers are approved for less than they expected.
What counts as income
Lenders are careful about what income they count. Generally accepted income includes:
- Employment salary or wages, with proof of stability
- Self-employment income, usually averaged over two years
- Rental income, often counted at 50% to 80% of gross rent, depending on the lender
- Pension income
- Investment income, if consistent and documented
- Child tax benefits and other government benefits, in some cases
Income that is harder to use includes:
- Overtime or bonuses, unless consistent over two years
- Cash income that is not declared on tax returns
- Future expected raises that have not yet taken effect
- One-time income such as capital gains from a single sale
If you are self-employed, your tax returns matter more than your actual cash flow. Lenders use your declared net income, not your gross revenue. If you have been writing off expenses aggressively to reduce taxes, your qualifying income may be lower than you expect. This is a common surprise for self-employed borrowers.
How to improve your GDS and TDS
There are four practical ways to improve these ratios before you apply:
1. Increase your down payment. A larger down payment reduces the mortgage amount, which reduces the monthly payment, which lowers both GDS and TDS. Every additional $10,000 in down payment reduces the mortgage payment by roughly $60 per month at current rates, which can move your ratios by more than half a percentage point.
2. Pay down other debts. This is often the fastest way to improve TDS. Paying off a $400 monthly car payment frees up 4% of TDS room on a $10,000 monthly income. That room can translate into roughly $75,000 to $90,000 in additional mortgage capacity. Credit card balances are particularly important, because lenders use the minimum monthly payment in TDS, and high balances mean high minimums.
3. Choose a longer amortization if you qualify. A 30-year amortization lowers the monthly payment compared to 25 years. On a $500,000 mortgage at 5.25%, the payment drops from about $2,972 to about $2,721. That $251 reduction improves both ratios. The trade-off is more interest paid over the life of the mortgage. Thirty-year amortizations are available for uninsured mortgages with at least 20% down.
4. Document all income sources. If you have rental income, a side business, or regular investment income, make sure it is documented and presented to the lender. Some borrowers leave qualifying income out of their application simply because they did not think to include it.
What happens if your ratios are too high
If your GDS or TDS exceeds the limits, you have several options:
- Buy a less expensive home, which reduces the mortgage payment
- Increase your down payment, which reduces the mortgage amount
- Pay down debts before applying, which improves TDS
- Wait and save, which improves both your down payment and your financial stability
- Consider a different lender, as some lenders have more flexibility than others, particularly credit unions and alternative lenders (though rates may be higher)
What you should not do is misrepresent your income, debts, or down payment source. Mortgage fraud is a serious offence in Canada, and lenders verify income and debts through multiple sources.
GDS and TDS are not your budget
It is important to understand what GDS and TDS do not measure. They do not include food, transportation, childcare, clothing, entertainment, savings, or emergency reserves. A household can pass GDS and TDS limits and still feel stretched, if other living costs are high.
Use GDS and TDS as the lender’s test, not as your personal affordability test. Before you commit to a mortgage, build your own monthly budget that includes all your actual expenses, not just debts. The lender’s approval tells you the maximum you can borrow. Your budget tells you what you should borrow. Those two numbers are often different, and the lower one is usually the wiser choice.