Debt service ratio

A debt service ratio compares a borrower's monthly obligations with their gross monthly income, expressed as a percentage. In Canada, lenders use two versions when they qualify a mortgage applicant. The first is the gross debt service ratio, or GDS, which counts only housing costs: the mortgage payment (principal and interest), property taxes, heating, and often half of any condo fees. The second is the total debt service ratio, or TDS, which adds every other recurring debt on top of housing, such as car loans, credit card minimums, student loans, and lines of credit.

The two ratios work as a pair. A lender checks GDS first to see whether the home itself is affordable against income, then checks TDS to see whether the rest of the borrower's debts leave enough room for the mortgage. Federally regulated lenders in Ontario generally follow the limits set in their own underwriting policies, and mortgage insurers have their own thresholds, so the numbers that apply to a given file depend on the lender and the type of mortgage.

Debt service ratios matter because they shape how much a buyer can borrow, which in turn determines whether a purchase is realistic. For someone looking at a rent to own arrangement in Ontario that is expected to end in a conventional mortgage, the GDS and TDS calculations are often what decide whether that final step is possible. A high car payment or existing credit card balances can reduce the amount available even when income looks strong on paper.

People sometimes confuse these ratios with a debt to income ratio, which is a broader term. The debt service ratio is specifically tied to the monthly cost of carrying debt. If you want to find advisers who can run these numbers for your situation, see mortgage and credit support providers in this directory.

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