What is the GDS (Gross Debt Service ratio)?
GDS is an acronym for Gross Debt Service ratio. It is a financial ratio that helps lenders determine how much mortgage you can afford. The ratio measures how much of your gross monthly income goes toward housing costs. These costs include mortgage payments (principle + interest), property taxes, heating and condo fees (if applicable). All other housing costs such as electricity, water, internet, groceries, insurance, etc. are not counted in GDS.
How is the GDS ratio calculated?
The GDS ratio is calculated as the sum of your housing costs, (Mortgage + Taxes + Heating + Condo Fee) divided by your gross monthly (i.e. your pre-tax) income. For instance, let’s say that you make $10,000 per month ($120k per year), before tax. And, let’s also say that your total monthly housing costs are:
- Mortgage = $2,438 (principle + interest)
- Property tax = $700 (school + municipal)
- Heating = $500
- Condo fee = $500
Using the following formula for the GDS ratio:
GDS ratio = ((Mortgage + Taxes + Heating + Condo Fees) / Gross Monthly Income) * 100
Your GDS ratio is calculated as:
GDS ratio = ((2,438 + 700 + 200 + 500) / 10,000) * 100 = 38.38%
How to interpret the GDS ratio?
From our example above, your GDS ratio was calculated as 38.38%. This simply means that 38.38% of your gross monthly income is expected to go toward your housing costs.
If you earn $10,000 per month, a GDS ratio of 38.38% means that $3,838 of your income will go toward your combined mortgage payment, taxes, heating, and condo fees.
For comparison, a GDS ratio of 50% would mean that $5,000 out of your $10,000 gross monthly income would be required for housing. Ratios this high become risky because you have far less income available for everything else. For instance food, car payments, savings, emergencies, and so on.
Because of this, lenders and mortgage insurance providers set strict GDS limits to reduce the risk of borrowers taking on more housing costs than they can realistically afford. These limits are published as two numbers:
- Standard GDS threshold: ~35%
- Maximum GDS threshold: ~39%
Anything below the maximum threshold is typically acceptable, though some lenders may have internal policies that are slightly stricter depending on your credit score, debt levels, and down payment.
Many financial experts recommend keeping your GDS below 30%, even if the bank is willing to approve you at a higher number. This is because, if too much of your income goes toward housing, you may struggle to build an emergency fund, invest for retirement, or simply enjoy your life outside of your home.