What it means
When someone applies for a mortgage, the lender does not look only at the new payment. It adds up the housing costs, such as mortgage payments, property taxes and heating, together with every other debt payment, such as car loans, credit cards and student loans, and compares the total with gross income.
The measure is widely used in Canadian mortgage lending, where it sits alongside the gross debt service ratio, which counts housing costs only. In other markets the same idea goes by names such as the back-end ratio or debt-to-income ratio.
Lenders set a ceiling for the ratio, and the exact limits differ between lenders, loan types and regulators and change over time. A borrower above the ceiling may be offered a smaller loan, asked for a larger deposit, or declined altogether.
The ratio is useful because it captures the whole burden of debt rather than just the new loan. A buyer may look affordable on the mortgage alone, but a heavy car loan and card balances can push the total to a level that is hard to sustain.
Be careful with the word "total" in two senses. In consumer lending the ratio uses gross income, but in corporate finance a similar concept, the debt service coverage ratio, divides operating income by debt payments, so the two are inverted and should not be confused.
The ratio is a screening tool, not a full picture of affordability. It ignores childcare, food and transport costs, and a household with unstable income may find even a moderate ratio uncomfortable, so sensible borrowers test their own budget as well.
In practice
Real-world examples.
Example
A couple earning $9,000 a month combined applies for a mortgage. Their housing costs would be $2,700 and their other debts are $900 a month, so the lender calculates a ratio of 3,600 / 9,000 = 40%.
Example
A young engineer wants to buy her first flat. After the lender includes her $450 student loan payment and $200 of credit card payments, her ratio is higher than she expected, so she pays off the card first and reapplies.
Example
A mortgage broker advises a self-employed client to wait a year before applying. The client's income is rising but not yet shown on tax returns, so the ratio on documented income looks too high for the loan he wants.
Formula
Calculation
Total Debt Service Ratio = (Housing costs + Other debt payments) / Gross income
Suppose a household earns $120,000 a year, which is $10,000 a month before tax. Monthly housing costs are $2,400 (mortgage payment, property tax and heating), and other debt payments are $800 (a $500 car loan and $300 of minimum credit card and student loan payments). TDS = (2,400 + 800) / 10,000 = 3,200 / 10,000 = 32%. If the lender's ceiling were 40%, this household would have room to take on another 0.08 x 10,000 = $800 a month of payments.Case study
Seen in the real world.
Oakfield Mortgage Advisers is an illustrative, fictional brokerage whose client, a family earning $11,000 a month before tax, wanted to buy a home with housing costs of $3,300 a month. The family also had a $650 car loan and $350 of other debt payments, giving a total debt service ratio of (3,300 + 650 + 350) / 11,000 = 39.1%.
The lender's ceiling was 40%, so the application would have passed by a narrow margin, but the broker pointed out that any increase in interest rates at renewal would push the ratio over the line. The broker suggested clearing the $350 of other debt using savings, which reduced the ratio to 3,950 / 11,000 = 35.9%.
The family bought the home with a more comfortable buffer. The illustrative lesson is that the ratio can often be improved by paying off small debts before applying, and that a buffer matters as much as meeting the limit.
Watch out
Common mistakes.
- Calculating the ratio using take-home pay instead of gross income, which makes the result look far worse than the lender will see it.
- Forgetting to include property tax, heating and condominium or strata fees in housing costs, so the ratio is understated.
- Assuming that passing the ratio means the loan is affordable, when the household budget may still be stretched.
Questions
People also ask.
What is the difference between the gross and total debt service ratios?
The gross ratio counts only housing costs against income, while the total ratio adds all other debt payments.
Can a co-borrower improve the ratio?
Yes, because adding a second income raises the denominator, but the co-borrower's own debts are added to the numerator, so the effect depends on both.
How can I lower my ratio before applying?
You can pay off small loans and card balances, reduce a requested loan amount, increase your deposit or add documented income.
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