GDS/TDS and How They Affect Your Mortgage Qualification

When it comes to securing a mortgage, there are two important financial metrics that lenders carefully consider to determine your qualification, Gross Debt Service (GDS) and Total Debt Service (TDS). Let's go into these concepts and explore their impact on your mortgage qualification.

Defining GDS and TDS

Gross Debt Service (GDS) is the percentage of the monthly income that covers your housing costs. On the other hand, Total Debt Service (TDS) is the percentage of your monthly income that covers your housing costs and other debts.

Thresholds for Insured Files

For insured files (mortgages with less than a 20% down payment), stricter limits are imposed. GDS cannot go higher than 39%, and TDS cannot go higher than 44%. There are no exceptions to this with an insured file, and it is a hard stop if you go over these amounts.

Scrutiny for GDS Close to Limits

If you have a GDS or TDS closer to these limits, your file may be subject to more scrutiny from the lenders and insurers. If your GDS and TDS are much lower than these thresholds, it means that the mortgage and housing costs are much less in relation to your income. Maintaining a comfortable buffer below these thresholds is advisable for a smoother mortgage approval process.

Lender Nuances

Different lenders have their own nuances in the calculation process and how inputs are used. Variances may arise in the treatment of variables such as how they calculate income, property taxes (some allow the net amount after factoring in the Home Owner Grant), and they can have their own methods for calculating heat.

Stress Testing Mortgage Payments

When factoring in the monthly mortgage payment, it is not based on the contract rate alone. Instead, the stress-tested amount is used, which is calculated as the greater of the contract rate plus 2% or the Bank of Canada's benchmark rate.

Conventional Mortgages and Ratios

Opting for a conventional mortgage with a 20% down payment allows for more flexibility with GDS and TDS ratios, enabling you to stretch these ratios further. Some lenders might not factor in these ratios at all. This allows you to qualify for a larger mortgage. However, in these cases, additional down payment requirements, fees, and potentially higher interest rates may apply, depending on the lender.

Improving Your Ratios

To improve your GDS and TDS ratios, you would need to increase your income, reduce the mortgage amount (potentially with a higher down payment), and reduce other debts. These adjustments contribute to a healthier financial profile and increase your chances of mortgage approval.

Affordability and Default Prevention

While GDS and TDS ratios may pose challenges in securing a larger mortgage, they are implemented to ensure affordability and mitigate the risk of defaulting. These measures protect both lenders and borrowers.

In conclusion, an understanding of GDS and TDS is important for navigating the mortgage qualification process successfully. By being mindful of these metrics and making strategic financial decisions, you can improve your eligibility and move closer to realizing your homeownership goals.

Interested in purchasing a property and not sure where your qualification stands? Reach out and we can work on a pre-approval for your situation.