What it means
Lenders want to be confident that a household can keep up its payments even if circumstances change. GDS gives them a quick test focused on housing costs alone, ignoring other debts such as car loans and credit cards.
A low ratio suggests the home is comfortably affordable and a high ratio suggests the borrower is stretched. The housing costs included are fairly standard.
They are the monthly mortgage principal and interest, the property taxes, the heating costs and, for condominiums, a set share of the monthly fees, often half. Insurance and utilities other than heating are generally not counted, although lenders can vary the details.
The ratio is calculated on gross income, meaning income before tax and deductions. That makes it look more forgiving than a measure based on take-home pay, which is why lenders apply a firm ceiling.
The ceiling is set by the lender or by regulation and is commonly in the region of 32% to 39% of gross income, with the exact limit depending on the lender and the borrower. GDS is paired with a second measure, the Total Debt Service ratio, which adds all other debt payments to housing costs.
A borrower must usually pass both tests, so a person with low housing costs but heavy credit card debt can still be turned down. Understanding both ratios helps a household decide how big a mortgage to request.
Lenders also test the numbers at a higher interest rate than the one actually offered. The idea is to make sure the borrower could still pay if rates rose at renewal.
This stress test can cut the amount that someone is allowed to borrow even when today's payment looks easily affordable. The nuance for non-specialists is that passing the ratio does not mean a mortgage is wise.
The ratio measures what a lender will allow, not what fits a family's own budget, and a borrower close to the limit has little room for a rise in costs.
In practice
Real-world examples.
Example
A couple earning $150,000 applies for a mortgage on a townhouse. Housing costs come to $42,000 a year, giving a GDS of 28%, which is well inside the lender's limit, so the application moves forward.
Example
A single buyer with a $90,000 salary wants a condominium with high monthly fees. Half the fees count towards GDS, and the result is 37%, so the lender asks for a larger deposit to bring the ratio down.
Example
A mortgage broker reviews a family whose GDS passes at 31% but whose total debt service ratio fails because of a large car loan. The broker advises paying off the loan before applying again.
Formula
Calculation
GDS = (mortgage payments + property taxes + heating + 50% of condominium fees) / gross household income x 100
Suppose a household earns $120,000 a year. Annual mortgage payments are $27,600, property taxes are $4,200, heating is $1,800 and condominium fees are $4,800, of which 50% is $2,400. Total housing costs are 27,600 + 4,200 + 1,800 + 2,400 = $36,000. GDS = 36,000 / 120,000 = 0.30, or 30%. If the lender's ceiling is 32%, the household passes, with limited room to spare.Case study
Seen in the real world.
Maplecrest Mortgage Advisers is an illustrative, fictional brokerage that noticed many of its clients were being declined late in the process. The cause was that clients had chosen homes on the basis of the monthly mortgage payment alone, without allowing for property taxes and heating that the lender counted in GDS.
The firm built a simple one-page calculator that asked for the full list of housing costs at the start. Clients using it saw their expected GDS before they made an offer, and declined applications at the last stage fell sharply over the following year.
The illustrative lesson is that GDS punishes people who look only at the mortgage payment, and a short calculation done early saves a failed application later.
Watch out
Common mistakes.
- Calculating GDS from take-home pay instead of gross income, which gives a ratio far higher than the one the lender will use.
- Counting only the mortgage payment and forgetting property taxes, heating and a share of condominium fees.
- Assuming that passing GDS is enough, when lenders also test the total debt service ratio that includes other debts.
Questions
People also ask.
What is a good GDS ratio?
Lower is better, and anything comfortably below the lender's ceiling, which is often in the low to high 30s as a percentage, is generally seen as affordable.
How is GDS different from the Total Debt Service ratio?
GDS covers housing costs only, while the Total Debt Service ratio adds all other debt payments such as loans and credit cards.
Does GDS include utilities such as electricity and water?
Usually not, because the standard calculation counts heating only, though individual lenders can vary the detail.
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