How GDS and TDS affect mortgage qualification

GDS measures housing costs relative to gross qualifying income before tax. Using monthly figures, divide qualifying housing costs by gross monthly income and multiply by 100. Keep the time period consistent: do not divide monthly expenses by annual income.

TDS starts with those same housing costs and adds assessed payments for other debts. Divide that total by gross monthly qualifying income and multiply by 100. A car loan or credit balance can therefore affect borrowing capacity even when the proposed housing costs have not changed.

CMHC’s published limits are 39% for GDS and 44% for TDS. These are qualification criteria, not approval guarantees or universal limits for every mortgage. The lender must also assess income, credit, down payment, property and other application requirements.

CMHC includes principal and interest, property taxes and heating costs. Where applicable, 50% of condominium fees is included in both ratios. The mortgage payment calculation should reflect the relevant loan amount, amortization and any mortgage insurance premium added to the loan.

Heating should use actual records when available. Where there is no ready history, CMHC calls for a reasonable estimate supported by the property’s characteristics, including size, location and heating system. Leaving heat out because the seller has not supplied a bill understates the calculation.

For a condo, the 50% qualification treatment is not your actual cash expense. You still need to budget the full condo fee. Likewise, maintenance, insurance, groceries, transportation and savings remain real costs even when they are not all included in the GDS formula.

For a mortgage application subject to the standard stress test, qualification uses the greater of the contract rate plus two percentage points or 5.25%. These are qualifying-rate rules, not a quoted mortgage rate. Applicable exceptions and transaction-specific rules must be checked.

The higher qualifying rate produces a qualifying principal-and-interest payment for the ratios. Your actual contractual payment may be lower. Passing the ratios using the actual payment alone does not establish that the application passes the required stress test.

Other debt payments also need the lender’s prescribed treatment. For example, CMHC specifies an assessed payment of at least 3% of the outstanding balance for unsecured lines of credit and credit cards. Do not assume the minimum shown on a statement is always the qualifying amount.

This illustration begins with an assumed qualifying mortgage payment. It does not calculate a mortgage amount or demonstrate approval. All amounts are hypothetical monthly figures, and the qualifying payment is assumed to have already been calculated under the applicable stress-test rules.

Gather income documents, debt statements, property tax information, heating records and condo fee details. Tell your broker about debts and payment obligations early so the calculation does not depend on incomplete information. Variable income and rental situations require additional review.

Then build a separate take-home-pay budget using full actual expenses. Rahul can help explain the qualification calculation for a Bedford or Halifax purchase, while you decide what payment leaves enough room for everyday life, repairs and savings.