How do lenders calculate your debt ratio

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How do lenders calculate your debt ratio

Mortgage lenders use what is called a debt ratio to figure out what you qualify for in terms of a mortgage. Here is a brief outline of the two basic ratios they look at.

GDS Ratio (Gross Debt Ratio) – this is the ratio of your mortgage debt into your income. Your GDS ratio includes the following:

  • Mortgage payment
  • Property taxes
  • Heating
  • Strata fees (if condo)

The GDS ratio is calculated by taking the total of the above items and dividing it into your income.

If your credit score is less than 680 then the GDS Ratio has to be less than 35% of your income. If your credit score is greater than 680 then it can go as high as 39% of your income.


TDS Ratio (Total Debt Ratio)
– this is the ratio of all your debt into your income. Your TDS ratio includes all payments from your GDS ratio above plus all other debt payments including:

  • Credit cards – lenders use a payment of 3% of the balance regardless of what the actual payment is.
  • Unsecured lines of credit – lenders use a payment of 3% of the balance regardless of what the actual payment is.
  • Secured lines of credit – if you have a line of credit secured by your home the payment is most likely interest only. However, lenders will use a payment of the balance owing amortized over 25 years.
  • Personal loans – lenders will use the payment shown on the credit bureau.

The TDS ratio is calculated by taking the total of the above items and dividing it into your income.

If your credit score is less than 680 then the TDS Ratio has to be less than 42% of your income. If your credit score is greater than 680 then it can go as high as 44% of your income.
As you can see from the above there are different ratios based on different credit scores. Also, in many circumstances lenders use higher payments than what are actually shown on your bureau.

With regards to your income most lenders also follow a couple of general guidelines:

  • If you are an employee, lenders will use your guaranteed hours times your guaranteed wage.
  • If you earn bonus or overtime income then they will use a two year average of your income.
  • If you are self-employed as a sole proprietor then lenders will use a two year average of the net income on your tax return plus 15%.
  • If you are self-employed and incorporated then lenders will use a two year average of the net income on your tax return.

These are just general guidelines and there are circumstances where we are able to use more income than indicated above.

We suggest contacting our office if you are looking to get a figure pinned down for what you qualify for. There are many variables in determining both income and debt payments and we can give you the exact details you need.

For more information on our mortgage products please visit our website at www.ymscanada.ca.

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About the Author:

Alex Kotai

Alex Kotai has worked in the mortgage lending business for over 10 years. His career started at HSBC Bank Canada where he spent most of his time in senior management roles which involved training and managing the sales staff at his branch. After leaving HSBC, Alex decided to open his own mortgage brokerage firm, Your Mortgage Source. Through his company, Alex has access to many lenders across the country with a very expansive list of products.