What is a Debt Service Ratio?

Last updated: May 2019

To get a mortgage,  borrowers must be able to meet their financial commitments in addition to the cost of shelter, so their financial capacity for the total repayment obligations is assessed. This is referred to as a Total Debt Service (TDS) ratio and compares the carrying costs of shelter expenses plus all other existing debt payments in relation to the applicant’s income.   For example, if your monthly household gross income is $4000 and all your payment obligations including, say, a car payment, 3% of your credit card balances, a student loan, and the new mortgage, property taxes and an allowance for natural gas heating are $2000/mo, then your TDS is $2000/4000 = 50%.

Note – Under the National Housing Act’s Lender Guidelines for CMHC high-ratio financing (ie: any down payment or equity position less than 20% of property value), the standard maximum qualifying TDS ratio is considered to be 42%.  In the TDS example above, the applicant has too much debt.

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Topics: Debt Servicing, FAQ