TDS vs. GDS: What Nova Scotian Homebuyers Need to Know

When applying for a mortgage in Canada, you'll quickly encounter two critical acronyms: GDS and TDS. These debt service ratios are fundamental tools that lenders use to determine your mortgage eligibility and the amount you can borrow. Understanding these ratios can make the difference between mortgage approval and rejection, or between securing favorable rates and settling for higher costs.

What Are GDS and TDS Ratios?

GDS (Gross Debt Service) Ratio Explained

The Gross Debt Service (GDS) ratio measures what percentage of your monthly gross income goes toward housing-related expenses. This ratio helps lenders assess whether you can comfortably afford your housing costs without overextending yourself financially.

What's included in GDS calculations:

• Mortgage payments (principal and interest)
• Property taxes
• Heating costs
• 50% of condominium or maintenance fees (if applicable)

GDS Formula:

(Mortgage Payments + Property Taxes + Heating + 50% of Condo Fees) ÷ Gross Monthly Income × 100

Standard GDS limit: Most Canadian lenders prefer a GDS ratio of 39% or lower.

TDS (Total Debt Service) Ratio Explained

The Total Debt Service (TDS) ratio provides a more comprehensive picture by including all your monthly debt obligations, not just housing costs. This ratio shows lenders your complete debt load relative to your income.

What's included in TDS calculations:

• All GDS expenses (listed above)
• Credit card minimum payments
• Car loan payments
• Student loan payments
• Personal loan payments
• Lines of credit payments
• Child support or spousal support payments

TDS Formula:

(GDS Expenses + All Other Monthly Debt Payments) ÷ Gross Monthly Income × 100

Standard TDS limit: Most Canadian lenders prefer a TDS ratio of 44% or lower.

How Do GDS and TDS Affect Mortgage Approval?

Both ratios are crucial factors in the mortgage approval process. Lenders use these calculations to evaluate your ability to service debt and manage new mortgage payments without financial strain.

When Your GDS Ratio Is Too High

If your GDS exceeds 39%, you may face several challenges:

• Smaller mortgage approval than desired
• Requirement for a larger down payment
• Need to consider less expensive properties
• Limited lender options

When Your TDS Ratio Is Too High

Exceeding the 44% TDS threshold often results in:

• Mortgage application rejection
• Higher interest rates if approved
• Requirement to pay down existing debts before reapplying
• Need to work with alternative lenders at less favorable terms

Exceptions and Flexibility

While these ratios are standard guidelines, some flexibility exists for borrowers with:

• Excellent credit scores (typically 750+)
• Significant liquid assets or savings
• Stable, high income with strong employment history
• Substantial down payment (20% or more)

However, even in these cases, exceeding the ratios often means working with non-prime lenders at higher interest rates.

What Constitutes "Good" GDS and TDS Ratios?

Ratio Type
Standard Limit
Preferred Range
Benefits
GDS
39%
Under 35%
Better rates, more lender options
TDS
44%
Under 42%
Easier approval, favorable terms

Why Lower Is Better

Maintaining ratios well below the maximum limits offers several advantages:

• Access to prime lending rates
• More mortgage product options
• Easier qualification process
• Greater negotiating power
• Financial breathing room for unexpected expenses

Practical Tips to Improve Your GDS and TDS Ratios

Before Applying for a Mortgage

Pay Down Existing Debts Focus on reducing high-interest debt first, particularly credit cards and personal loans. Even small reductions can significantly improve your TDS ratio.

Increase Your Down Payment A larger down payment reduces your required mortgage amount, directly improving your GDS ratio. Consider delaying your purchase to save more if your ratios are borderline.

Consolidate High-Interest Debt Consolidating multiple debts into a single, lower-payment option can improve your TDS ratio. However, avoid taking on new debt after consolidation.

Consider Income Boosting Strategies Document all sources of income accurately, including:

• Part-time work
• Rental income
• Investment income
• Regular bonuses or commissions

During the Home Shopping Process

Set a Realistic Budget Use GDS and TDS calculations to determine your true affordability, not just what lenders might approve. Aim to keep your GDS ratio around 32-35% for comfort.

Factor in All Costs Remember that your GDS calculation should include:

• Property taxes (which vary by location)
• Heating costs (higher for older or larger homes)
• Condo fees (if applicable)
• Home insurance

Shop Around Different lenders may have slightly different ratio requirements or calculation methods. Working with a mortgage broker can help you find the best fit.

Real-World Examples

Example 1: Strong Ratio Position

• Gross Monthly Income: $8,000
• Mortgage Payment: $1,800
• Property Taxes: $400
• Heating: $150
• Other Debts: $500

GDS Calculation: ($1,800 + $400 + $150) ÷ $8,000 = 29.4% ✓ TDS Calculation: ($2,350 + $500) ÷ $8,000 = 35.6% ✓

This borrower is in excellent shape for prime lending.

Example 2: Borderline Position

• Gross Monthly Income: $6,000
• Mortgage Payment: $1,900
• Property Taxes: $300
• Heating: $100
• Other Debts: $800

GDS Calculation: ($1,900 + $300 + $100) ÷ $6,000 = 38.3% ⚠️ TDS Calculation: ($2,300 + $800) ÷ $6,000 = 51.7% ✗

This borrower needs to reduce debt or consider a less expensive property.

The Bottom Line

Understanding and optimizing your GDS and TDS ratios is crucial for Canadian homebuyers. These ratios not only determine your mortgage eligibility but also influence the interest rates and terms you'll qualify for. By maintaining ratios well below the maximum limits, you'll have access to better mortgage products and greater financial flexibility.

Before beginning your home search, calculate your current ratios and take steps to improve them if necessary. This preparation will strengthen your position when it's time to apply for a mortgage and help ensure your home purchase is financially sustainable for years to come.

Key Takeaway: Aim for a GDS under 35% and TDS under 42% to maximize your mortgage options and secure the most favorable terms available to Canadian homebuyers.