With the weather getting nicer by the day, people are in full-on summer mode, even despite the social distancing rules we all still face. With that comes the usual summer rush of people looking to buy and sell their homes. If you’re in the group looking to buy, then the acronyms “GDS” and “TDS” should mean something to you.
What!? They don’t? Then it’s time to change that. Read on!
GDS & TDS Are Ratios
GDS and TDS are acronyms that actually refer to ratios. GDS stands for “Gross Debt Service” ratio, and TDS stands for “Total Debt Service” ratio. Both of them are measures of how much you spend servicing (i.e. paying down) your debt each month, though they work slightly differently from each other.
So why should you care?
Well, these ratios matter to the banks and other financial institutions that you’re going to be asking for a mortgage from. They use them to help determine whether, and how much, they’re willing to lend to you in order to buy your next home. Here’s how they work.
Gross Debt Service Ratio (GDS), Explained
Your Gross Debt Service ratio is the percentage of your annual income needed to pay for all of your monthly housing costs, including:
- Mortgage payments (both principal and interest)
- Property taxes
- Heating
- 50% of your monthly condo fees, if applicable
To calculate your GDS ratio, add all of the above together, then divide it by your monthly income before taxes. Take the resulting decimal number and multiply it by 100 – this is the percentage of your annual income that goes toward paying all of those above costs.
Traditionally, lenders like this number to be below 35 – anything more than that, and you’ll look to them like someone who might have difficulty paying down their debt if they were given any more. I say “traditionally” because, as we’ll see in a minute, this has changed a bit given the current economic environment (read – tons of people out of work due to COVID).
Total Debt Service Ratio (TDS), Explained
Once you understand GDS, calculating TDS is easy. It includes all of the expenses in GDS, plus the following:
- Car payments
- Credit Card Payments
- Line of credit and loan repayments
- Alimony payments, if applicable
Basically, your TDS is a measure of your ability to pay for not just your housing costs, but also all of your recurring debt and obligations (beyond your mortgage). The historical industry standard for your TDS is 42 – if you’re below that, you’re generally considered someone good to lend to.
Anything more, and you look a little bit more risky on paper. That doesn’t mean you can’t get a mortgage, it just means you might have a higher interest rate, or might need to do a little more work to prove you can handle the increased responsibility.
How COVID has Changed the GDS & TDS Standards
Here’s the thing – the standards for GDS & TDS have historically been 35 and 42, respectively. When times are good, though, lenders often find themselves willing to go above these numbers. All of a sudden, a GDS of 37 and TDS of 44 don’t look so bad. No lender wants to leave potential income on the table, so they make exceptions to the rule.
COVID changed all of that.
The shock to our economy means that lenders need to be far more careful in who they lend to. To enforce this, the Canada Mortgage & Housing Corporation (CMHC) – the organization that insures all mortgages where the home’s down payment is less than 20% – has mandated that anybody putting less than a 20% down payment on their new home will need to come in below these ratios, no exceptions.
If you’re one of the hopefuls trying to snag a deal on a new home during this timeframe, you’ll want to make sure your GDS and TDS are in line before getting too far down the process. It’s super-easy to check; all you need to do is use one of the countless free calculators online, like this one straight from CMHC themselves.
Wrapping it Up
Buying a house isn’t something we do every day, so it can be helpful to be reminded of some of the basics to have taken care of before you get the process started. If your household comes in above the 35/42 ratios required by CMHC, it’s not the end of the world. You can always pay off debt to get below the ratios, or consider saving up enough for a 20% down payment.
The most important thing is to be informed about your personal financial situation though, so that you don’t run into any nasty surprises right after you get excited about buying a new home!
