Total Debt Service Ratio (TDS): Calculation and 44% Threshold

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The TDS Ratio: Your Complete Debt Picture

If the GDS ratio measures your ability to handle housing costs, the Total Debt Service ratio (TDS) goes further by evaluating all of your financial obligations. This ratio constitutes the second qualification barrier that every Canadian mortgage borrower must clear. A borrower may have an excellent GDS ratio but fail the TDS test due to high consumer debts such as credit cards, car loans, or student loans.

TDS Calculation Formula

The TDS ratio is calculated by taking the same housing components as the GDS (mortgage payment at the qualifying rate, property taxes, heating, 50% of condo fees), then adding all monthly minimum payments on non-mortgage debts. The total is divided by the gross annual household income and multiplied by 100. The result must not exceed 44% to meet the requirements of OSFI and Canadian mortgage insurers.

Total Debt Service Ratio (TDS): A financial ratio measuring the proportion of a household's gross annual income devoted to all its financial obligations, including housing costs and all other recurring debts. In Canada, the maximum threshold is 44% according to OSFI guidelines and mortgage insurer standards (CMHC, Sagen, Canada Guaranty).

Debts Included in the TDS Calculation

Credit cards: 3% of the total balance is used as the minimum monthly payment, even if you pay the full balance every month. A $15,000 balance therefore represents $450 per month in the calculation.
Car loan: the actual monthly payment on the loan or long-term lease is included in full.
Student loan: the actual monthly payment is included. For deferred loans, some lenders estimate the payment at 1% of the total balance.
Personal line of credit: the estimated payment is generally 3% of the balance or the interest-only payment (approximately 0.5% of the balance per month), depending on the lender's policy.
Home equity line of credit (HELOC): the monthly interest payment based on the utilized balance is included in the calculation.
Alimony and child support: court-ordered payments are included in full.
Any other personal loan or recurring debt obligation.

TDS Calculation Example

Let us revisit the household with a gross income of $120,000 and monthly housing costs of $2,450 (GDS of 24.5%). This household also has a car loan of $400 per month, credit card balances totalling $8,000 (estimated payment of $240/month), and a student loan of $150 per month. The TDS calculation is: ($2,450 + $400 + $240 + $150) x 12 / $120,000 x 100 = $38,880 / $120,000 x 100 = 32.4%. The household qualifies under the 44% threshold. However, if the income were $80,000, the TDS would climb to 48.6%, exceeding the permitted threshold.

Strategies to Optimize Your TDS Ratio

Pay off high-payment debts: Identify the debts with the greatest impact on your TDS ratio and pay them off first before the mortgage application. A $500/month car loan has more impact than a credit card with a $2,000 balance ($60/month).
Reduce credit card balances: Since lenders use 3% of the balance, reducing your credit card balances has an immédiate effect on the ratio. Paying off $10,000 in balance frees up $300 per month in the TDS calculation.
Consolidate debts: Combining several small debts into a single loan with a lower monthly payment can improve the TDS ratio. However, make sure the consolidation does not create new available debt (reactivated credit cards).
Close unused accounts: Some lenders calculate a potential payment on unused lines of credit. Closing lines of credit and credit cards you do not need can improve your file, although this may temporarily affect your credit score.

Frequently Asked Questions

What is the exact formula for the TDS ratio?

TDS = (Mortgage Payment + Property Taxes + Heating + 50% of Condo Fees + ALL other monthly debts) / Gross Annual Household Income x 100. Other debts include credit card payments (3% of balance), car loans, student loans, lines of credit, and alimony. The result must be less than or equal to 44%.

What is the difference between GDS and TDS ratios?

The GDS ratio only considers housing costs (mortgage, taxes, heating, 50% condo fees) relative to gross income, with a 39% threshold. The TDS ratio adds all your other debt obligations (credit cards, car loans, student loans, lines of credit, etc.) to those housing costs, with a 44% threshold. Both ratios must be met simultaneously.

How do lenders calculate credit card payments for TDS?

Lenders use 3% of the total balance on each credit card as the minimum monthly payment, even if you pay the full balance every month. This means a $10,000 credit card balance counts as $300 per month in the TDS calculation. To optimize your ratio, reduce credit card balances before submitting your mortgage application.

Do student loans significantly affect the TDS ratio?

Yes, student loans can have a significant impact on the TDS ratio. The actual or estimated monthly payment is included in full. For loans in deferral, some lenders use 1% of the balance as the estimated payment. Paying off or reducing student loans before the mortgage application can considerably improve your borrowing capacity.

How can I reduce my TDS ratio if I exceed 44%?

Strategies include: paying off or consolidating high-payment debts before applying, paying down credit card balances, closing unused lines of credit (some lenders count the potential payment even on a zero balance), adding a co-borrower to increase income, or increasing the down payment to reduce the mortgage amount.

Can the 44% threshold be exceeded in certain cases?

For insured mortgages, the 44% threshold is strict. For conventional uninsured loans, some lenders and private financing solutions may accept a TDS ratio above 44%, but at a higher interest rate and with more restrictive conditions. B-lenders evaluate each file on a case-by-case basis.