Gross Debt Service Ratio (GDS): Calculation and 39% Threshold

RefinancePro.club

The GDS Ratio: First Test of Mortgage Qualification

Before approving a mortgage, every Canadian lender must ensure the borrower has the financial capacity to support housing-related payments. The Gross Debt Service ratio (GDS) is the first of two debt service ratios examined. It answers a simple question: what proportion of your gross income is devoted to the direct costs of your housing?

GDS Calculation Formula

The GDS ratio is calculated by dividing the sum of annual housing costs by the gross annual household income, then multiplying by 100 to obtain a percentage. Housing costs include four elements: the mortgage payment (principal and interest calculated at the qualifying rate), annual property taxes (municipal and school), estimated heating costs, and for a condominium, 50% of monthly condo fees. The result must not exceed 39% to meet OSFI and mortgage insurer standards.

GDS Components Explained

Mortgage payment: calculated at the qualifying rate over the chosen amortization period. For an insured loan, maximum amortization is 25 years. For a conventional loan, some lenders allow up to 30 years, which reduces the monthly payment and improves the GDS ratio.
Property taxes: the annual amount of municipal and school taxes for the target property, divided by 12 to obtain the monthly cost. For a purchase, the lender uses the municipal assessment or tax estimate provided by the real estate agent.
Heating costs: an estimated monthly amount based on standardized tables. In Quebec, lenders generally use between $100 and $175 per month for a single-family home, depending on the size and type of heating.
Condo fees: if the property is a condominium, 50% of monthly condo fees are added to housing costs. This 50% convention reflects the fact that a portion of the fees covers elements already included (heating, building insurance).

Practical GDS Calculation Example

Consider a household with a gross annual income of $120,000 looking to purchase a property. The monthly mortgage payment at the qualifying rate is $1,950, property taxes are $350 per month, and estimated heating costs are $150 per month. The calculation is: ($1,950 + $350 + $150) x 12 / $120,000 x 100 = $29,400 / $120,000 x 100 = 24.5%. This household easily qualifies under the 39% threshold. If the same household had an income of $80,000, the ratio would be 36.75%, still acceptable but with less margin.

Strategies to Improve Your GDS Ratio

Increase the down payment: A lower borrowed amount means a lower mortgage payment, which directly reduces the numerator of the GDS ratio.
Extend the amortization: Going from 25 to 30 years of amortization (available for conventional loans with 20% down) reduces the monthly payment. Note: this increases the total interest cost over the life of the loan.
Add a co-borrower: A spouse, parent, or co-borrower whose income is added to the denominator of the GDS ratio can bring the ratio below the 39% threshold.
Find a better rate: Even though the stress test applies, a lower contractual rate reduces the qualifying rate (contractual + 2%), which decreases the payment used in the GDS calculation.

Frequently Asked Questions

What is the exact formula for the GDS ratio?

GDS = (Mortgage Payment + Property Taxes + Heating Costs + 50% of Condo Fees) / Gross Annual Household Income x 100. The mortgage payment is calculated at the qualifying rate (stress test), which is the greater of the contractual rate + 2% and 5.25%. The result must be less than or equal to 39%.

What do heating costs include in the GDS calculation?

Lenders use an estimated amount for heating, often based on standardized tables by property type and region. In Quebec, this amount typically ranges from $100 to $175 per month for a single-family home and $50 to $100 per month for a condo. It includes gas, electric, or oil heating.

Is the 39% threshold the same for all lenders?

For insured mortgages (CMHC, Sagen, Canada Guaranty), the 39% threshold is a strict and uniform requirement. For conventional uninsured mortgages, some lenders accept a GDS slightly above 39% if compensating factors are present, such as a high credit score (750+), significant financial reserves, or a low loan-to-value ratio.

How can I reduce my GDS ratio if I exceed 39%?

Several strategies exist: increase your down payment to reduce the loan amount, extend the amortization period (up to 25 years for insured or 30 years for conventional), consider selecting a less expensive property, add a co-borrower with additional income, or find a better rate to reduce the monthly payment.

Are rental incomes included in the GDS calculation?

Yes, but only partially. Lenders generally consider 50% to 80% of gross rental income in the eligible income calculation, depending on their internal policy and whether the rental income comes from a secondary suite in the property being purchased or from an existing property. A mortgage broker can maximize the inclusion of your rental income.