One of the most critical questions in home buying isn't about location, square footage, or granite countertops—it's about numbers. Specifically, understanding how lenders calculate the maximum amount you can borrow and what you can realistically afford.
The mortgage industry relies on two key ratios to determine affordability: the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio. These formulas have been used for decades by Canadian lenders to assess whether borrowers can comfortably handle their housing costs alongside other financial obligations. Understanding these ratios isn't just academic—it's the difference between getting approved for a mortgage and facing rejection, or worse, buying a home you can't actually afford.
Let's break down exactly how these calculations work, using real numbers that demonstrate how income, debts, and housing costs interact to determine your maximum home price.
The Gross Debt Service ratio measures what percentage of your gross (pre-tax) monthly income goes toward housing costs. In Canada, lenders typically want this ratio to be 39% or less, though some lenders may allow up to 44% in specific circumstances.
Monthly Housing Costs include:
Lenders use the higher of the actual contract rate or the Bank of Canada's posted benchmark rate when calculating your mortgage payment for qualification purposes. This ensures you can handle payments even if rates increase.
Annual Gross Income
$85,000
Monthly Gross Income
$7,083
($2,915 ÷ $7,083) × 100 = 41.15%
Sarah's GDS ratio is 41.15%, which is above the preferred 39% but still within the acceptable maximum of 44% that some lenders allow. She would likely qualify based on GDS, but the lender will also check her TDS ratio.
The Total Debt Service ratio is similar to GDS, but it includes all your monthly debt obligations. This gives lenders a complete picture of your financial commitments. The maximum TDS ratio lenders accept is typically 44%, though this can vary slightly between institutions.
Other Debts include:
Even if your credit card has a $10,000 limit and you only owe $1,000, lenders will use 3% of the balance ($30/month) in their calculations. They may also consider a minimum payment even if you pay off your balance monthly. Having high credit card limits with no balance can still impact your borrowing capacity.
Let's continue with Sarah's scenario and add her other monthly debt obligations:
Additional Monthly Debts:
($3,635 ÷ $7,083) × 100 = 51.32%
The Problem: Even though Sarah's GDS ratio was acceptable at 41.15%, her TDS ratio of 51.32% exceeds the 44% maximum. This means Sarah would likely be declined for this mortgage amount, or she would need to:
To get Sarah's application approved, we need to find a home price that keeps both her GDS and TDS ratios within acceptable limits. Let's work backwards from the maximum allowable ratios.
Monthly Gross Income: $7,083
Maximum TDS (44%): $7,083 × 0.44 = $3,117
Existing Monthly Debts: $720
Maximum for Housing Costs: $3,117 - $720 = $2,397
Maximum Housing Costs: $2,397
Monthly Property Taxes (estimated): $300
Monthly Heating: $150
Maximum Mortgage Payment: $2,397 - $450 = $1,947
Using the qualification rate of 5.25% over 25 years, a monthly payment of $1,947 supports a mortgage of approximately:
$326,000
With a 10% down payment ($36,222), Sarah's maximum home price would be approximately:
$362,000
Pay Off the Car Loan ($425/month)
This would increase her available housing budget to $2,822/month, supporting a mortgage of ~$399,000 or a home price of ~$443,000
Increase Down Payment to 20%
This eliminates CMHC insurance premiums and reduces the mortgage amount needed, though it doesn't change the qualifying ratios
Add a Co-Borrower
A spouse or family member with additional income would increase the total gross income, allowing for higher housing costs
Increase Income
A raise, promotion, or additional income source (if verifiable and consistent) would increase borrowing capacity proportionally
Let's examine a different scenario to see how income and debt mix affects affordability differently.
Combined Annual Income
$145,000
Monthly Gross Income
$12,083
Maximum TDS Payment (44%):
$12,083 × 0.44 = $5,317
Less Existing Debts:
$5,317 - $1,150 = $4,167
Maximum Housing Costs Available:
$4,167/month
($3,820 ÷ $12,083) × 100
31.62%
($3,820 + $1,150 ÷ $12,083) × 100
41.14%
Result: Michael and Jennifer would qualify for this $650,000 home. Both their GDS (31.62%) and TDS (41.14%) ratios are within acceptable limits. Their higher combined income and manageable debt load give them significantly more purchasing power than Sarah's single income scenario.
The qualification rate (often the Bank of Canada's benchmark rate) can be significantly higher than your actual contract rate. As of early 2026, many lenders use a 5.25% qualification rate even if your actual rate is 4.5%.
Impact: A 1% difference in qualification rate can reduce your maximum mortgage by approximately $30,000-$50,000 depending on your income.
Most mortgages use 25-year amortization for calculations. First-time buyers with less than 20% down can now access 30-year amortization on some properties, which lowers monthly payments.
Impact: On a $400,000 mortgage at 5.25%, a 30-year amortization reduces monthly payments by approximately $185 compared to 25 years.
Minimum down payment is 5% on the first $500,000 and 10% on amounts above. Down payments under 20% require CMHC insurance, adding to your mortgage amount.
Impact: CMHC insurance on a $400,000 mortgage with 10% down adds approximately $15,200 (3.8% premium) to your mortgage principal.
Vary significantly by location. Toronto averages 0.6-0.7% of home value annually, while some smaller municipalities can be 1.5% or higher.
Impact: On a $500,000 home, the difference between 0.6% and 1.5% property tax rates is $375/month in your GDS calculation.
Lenders include estimated monthly heating costs. Older homes or properties with less efficient systems will have higher estimates, impacting your ratios.
Impact: An extra $100/month in heating costs reduces your maximum mortgage amount by approximately $16,000-$20,000.
If buying a condo, 50% of monthly condo fees are included in the GDS calculation. High condo fees can significantly reduce your borrowing capacity.
Impact: $500/month condo fees add $250 to your housing costs calculation, reducing maximum mortgage by approximately $40,000-$50,000.
Just because a lender approves you for a certain amount doesn't mean you should borrow the maximum. GDS and TDS ratios don't account for:
Many financial advisors recommend keeping your total housing costs below 30-35% of gross income for true financial comfort.
While every situation is unique, here's a general reference table showing approximate maximum mortgage amounts based on gross annual income, assuming minimal existing debt and typical property tax/heating costs:
| Annual Income | Monthly Income | Max Housing Costs (39% GDS) | Approx. Max Mortgage* | Approx. Home Price** |
|---|---|---|---|---|
| $60,000 | $5,000 | $1,950 | $260,000 | $289,000 |
| $75,000 | $6,250 | $2,438 | $330,000 | $367,000 |
| $90,000 | $7,500 | $2,925 | $400,000 | $444,000 |
| $100,000 | $8,333 | $3,250 | $450,000 | $500,000 |
| $120,000 | $10,000 | $3,900 | $545,000 | $606,000 |
| $150,000 | $12,500 | $4,875 | $690,000 | $767,000 |
| $200,000 | $16,667 | $6,500 | $930,000 | $1,033,000 |
*Assumptions: 5.25% qualification rate, 25-year amortization, $450/month for property taxes and heating combined
**Home price calculated assuming 10% down payment plus CMHC insurance premium
Existing Debts: Every $400/month in existing debt payments (car loans, credit cards, etc.) can reduce your maximum home price by approximately $65,000-$75,000.
Higher Property Taxes: If property taxes in your area are higher than $350/month, subtract approximately $20,000 from the home price for every additional $100/month in taxes.
Condo Fees: Reduce the home price by approximately $80,000-$100,000 for every $500/month in condo fees (50% included in GDS).
Lower Down Payment: With only 5% down, CMHC insurance premiums are higher (4% vs 3.1% at 10% down), effectively reducing purchasing power slightly.
Include base salary, guaranteed bonuses, and commission income (typically averaged over 2 years). Self-employed income requires 2 years of tax returns and may be averaged or discounted.
Include minimum credit card payments (or 3% of balances), car payments, student loans, personal loans, and any other recurring debt. Don't forget about obligations like child support.
Multiply your gross monthly income by 0.44 (or 0.39 for more conservative approval). This is your maximum total for housing + debts.
Take your maximum TDS payment and subtract all monthly debts. The remainder is what you can allocate to housing costs.
Research typical property taxes in your target area (check municipal websites) and estimate $150-$200/month for heating. Subtract these from your available housing budget.
What remains after subtracting property taxes and heating is your maximum monthly mortgage payment for qualification purposes.
Input your maximum payment with current qualification rates (typically 5.25% as of early 2026) and 25-year amortization to determine your maximum mortgage amount. Add your down payment to find your maximum home price.
The GDS and TDS ratios are powerful tools that lenders use to assess risk, but they're also valuable for your own financial planning. These calculations provide a framework for understanding how much house you can afford while maintaining financial stability.
The examples we've explored—from Sarah's single-income scenario to Michael and Jennifer's combined household—demonstrate how different financial situations produce vastly different affordability outcomes. Income level matters, but debt structure matters just as much. A $720 monthly debt obligation reduced Sarah's maximum home price by approximately $88,000 compared to having no debts.
Remember that these ratios represent maximum amounts for lender approval, not necessarily what's comfortable for your lifestyle. Many households find that keeping housing costs closer to 30-32% of gross income (rather than the maximum 39-44%) provides better financial flexibility for savings, emergencies, vacations, and quality of life.
Paying off a $10,000 car loan with a $350 monthly payment can increase your home buying budget by approximately $55,000-$60,000. If you have savings sitting in low-interest accounts, using some to eliminate monthly debt obligations can dramatically improve your purchasing power.
If interest rates are expected to decline, getting approved now at a higher qualification rate means you'll have built-in affordability cushion when your actual rate is lower. Conversely, if rates might rise, locking in sooner protects your purchasing power.
If you're planning to start a family, return to school, or make a career change, buy below your maximum. Reduced income or increased expenses will make maximum-stretched payments difficult to manage.
A house that qualifies at maximum GDS/TDS ratios leaves little room for the reality of homeownership: furnishing, maintenance, unexpected repairs, property improvements, and higher utility bills than your previous rental.
Financial experts recommend maintaining 3-6 months of expenses in emergency savings. If buying at maximum qualification exhausts your savings for the down payment and leaves no buffer, you're one job loss or major repair away from financial stress.
Understanding GDS and TDS ratios empowers you to calculate your own affordability before meeting with lenders. Armed with these numbers, you can shop for homes in a realistic price range, avoid disappointment, and make informed decisions about paying down debt, increasing your down payment, or adjusting your timeline.
The real estate market moves quickly, and knowing your numbers in advance puts you in a position of strength. You'll understand exactly how much house you can afford, what strategies might increase that amount, and most importantly, what financial commitment feels comfortable for your situation.
Your maximum qualification amount and your comfortable payment amount don't have to be the same—and in most cases, they shouldn't be.
Now that you understand how affordability is calculated, get your personalized pre-approval and start shopping with confidence.