Question Box: What are GDS and TDS Ratios?

The following ratios can help in determining whether you’re financially ready to purchase a home.

GDS stands for Gross Debt Service.  This ratio describes the percentage of gross annual income required to cover your payments associated with housing.   Housing costs include:

  • mortgage principal
  • interest
  • property taxes
  • heating expenses

The above three are referenced as P.I.T.H.    If the property is a condominium, you also include 50% of the condo fees in your calculation.  If it is a leasehold tenure (ie. site pad) you include that full amount as well.

TDS stands for Total Debt Service.   This ratio describes the percentage of gross annual income required to your housing payments AND all other debts and obligations, such as credit cards, car loans, etc.

THE RULES

According to CHMC, the first affordability rule is that your monthly housing costs shouldn’t be more than 32% of your gross household monthly income.   Again, this figure is known as your Gross Debt Service (GDS) ratio. Remember, it must be 32% or less of your gross household monthly income. (Sutton has their definition of GDS, excluding heat, being at 27%)

The second affordability rule is that your Total Debt Service (TDS) ratio shouldn’t be more than 40% of your gross monthly income.

To figure out your percentage, use the following:

GDS/TDS  =  Total monthly payments  (x 100)
Gross monthly income

PUTTING THE RULES TO THE TEST

In the Calgary Herald yesterday, a president and CEO of a builder presented a couple of financing scenarios to support his home-buying comments, based on a 5% down, with a 4.2% rate for 4 year term.

Scenario 1.

A household qualifying income for a $200,000 home would be less than $33,000.  Monthly PI would be $887.

Scenario 2.

For a $300,000 home, a family would need an annual income of slightly less than $50,000.  Monthly PI would be $1,330.

How do those two scenarios above compare to the GDS/TDS affordability rules?  What amortization length was used?

Here are some great calculators:

CMHC Mortgage Calculator

CMHC TDS Calculator

LendingMax GDS/TDS Calculator (scroll to bottom)

5 responses to “Question Box: What are GDS and TDS Ratios?

  1. Mike,
    Please post articles that pertain to the REAL Real Estate market please. I just wasted my time on this one.

  2. Rusty, lately I think many Home articles in the Saturday paper could have an entire Read Between The Lines blog article written about them. They’re essentially just advertisements under the guise of news, but I still think it’s good to take in as much information as you can from all sources – just glean the facts from opinion.

    David, why do you think calculating your GDS/TDS ratio doesn’t pertain to the REAL real estate market? If you were referring to the Herald article, I copied the relevant data into the blog post – nobody made you click that link 😛

  3. Mike (authentic)

    Thanks Mike for posting the GDS/TDS ratio topic. You are right, it is an important part of Real Estate and one which consumers should be aware of.

    I plugged in some average numbers and here is what I got:

    Average SFH price: $407,374
    Average 5.5% Fixed 5yr mortgage
    Average 2-working family income: $70,000

    TDS Ratio of: 46.2%

    I agree, your debt ratio shouldn’t be more than 32%. Especially in these times where it’s likely one will lose a job or have reduced pay/hours.

    Interesting note if I put in the new average Vancouver SFH price, $830k, use the same numbers it gives me a TDS Ratio of: 94.71% Wowzers. Not much room to pay income tax, food or wear clothes in there.

  4. Mike (authentic)

    I wanted to add that in winter 2003 when we went looking for a new build home we were pre-approved for $208,000k which was enough to easily buy a SW or NE new build in 03.

    But $203k was MAX on a dual income at 4.65% in 2003 we were offered with 10% down.

    Calgarians do not make much more per year than they did in 2003 (a few %), so if the average max was $203k in 2003, then why should it be DOUBLE that today? General incomes didn’t go up that much. In fact, Canadians are making $500 a year less than they did in 1985 (inflation adjusted dollars).

    Mike

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