Understanding Gross Debt Service Ratio (GDS) for Mortgages

What is Gross Debt Service Ratio (GDS) for Mortgages?

The Gross Debt Service Ratio (GDS) is a financial metric used by lenders to assess a borrower’s ability to manage their mortgage payments. It is a ratio that compares the borrower’s monthly housing costs to their gross monthly income. This ratio helps lenders determine whether a borrower can afford to take on a mortgage and make timely payments.

To calculate the GDS ratio, lenders consider the following housing costs:

• Mortgage principal and interest payments
• Property taxes
• Heating costs
• 50% of condo fees (if applicable)

The GDS ratio is expressed as a percentage. Generally, lenders prefer a GDS ratio of 35% or lower. This means that the borrower’s housing costs should not exceed 35% of their gross monthly income. A higher GDS ratio indicates a higher risk for the lender, as it suggests that the borrower may struggle to make their mortgage payments.

When applying for a mortgage, it’s crucial to understand your GDS ratio and ensure that it falls within the acceptable range set by lenders. If your GDS ratio is too high, you may need to adjust your housing budget or consider other options to increase your income.

The GDS ratio takes into account the borrower’s gross income and compares it to their housing expenses, including mortgage payments, property taxes, heating costs, and 50% of any condo fees. Lenders typically have a maximum GDS ratio that they are willing to accept, which is usually around 35-39%.

One of the main reasons why the GDS ratio is important is that it helps lenders determine whether a borrower can afford their mortgage payments. By considering the borrower’s income and housing expenses, lenders can assess the borrower’s ability to meet their financial obligations without experiencing financial hardship.

Furthermore, a low GDS ratio can also have a positive impact on a borrower’s creditworthiness. Lenders view borrowers with a lower GDS ratio as less risky because they have a higher disposable income after meeting their housing expenses. This can increase the borrower’s chances of getting approved for a mortgage and potentially obtaining more favorable terms and interest rates.

It is important for borrowers to carefully consider their GDS ratio before applying for a mortgage. They should calculate their housing expenses accurately and ensure that their income can comfortably cover these expenses. If the GDS ratio is too high, borrowers may need to consider adjusting their housing budget or increasing their income before applying for a mortgage.

Calculating GDS Ratio for Mortgage Applications

Calculating the Gross Debt Service (GDS) ratio is an essential step in the mortgage application process. It helps lenders determine whether a borrower can afford the mortgage payments based on their income and existing debts. To calculate the GDS ratio, you need to gather some financial information and follow a simple formula.

The first step is to determine your gross annual income. This includes your salary, bonuses, commissions, and any other sources of income. Make sure to include any co-borrower’s income if you are applying for a joint mortgage.

Next, you need to calculate your total housing costs. This includes your mortgage principal and interest payments, property taxes, heating costs, and 50% of any condo fees. If you are not sure about the exact amounts, you can estimate them based on the property’s listing or consult with your real estate agent.

Once you have your gross annual income and total housing costs, you can use the following formula to calculate your GDS ratio:

GDS Ratio = (Total Housing Costs / Gross Annual Income) x 100

For example, if your total housing costs are $2,000 per month ($24,000 per year) and your gross annual income is $60,000, the calculation would be as follows:

GDS Ratio = ($24,000 / $60,000) x 100 = 40%