If you’re applying for a mortgage, one key financial metric your lenders will want to look at is your Total Debt Service (TDS) ratio. It helps banks and lenders determine if you can realistically handle your mortgage payments along with the other monthly financial obligations.
TDS ratio is the percentage of your gross monthly income that goes toward housing costs and other debts—like car loans, credit card payments, and personal loans.
In this blog, we’ll break down what the TDS ratio is, how it’s calculated, why it matters, and what you can do to improve it. Whether you’re buying your first home or refinancing, understanding this ratio can make all the difference in getting approved and knowing what you can afford.
What Is a TDS Ratio?
TDS stands for Total Debt Service, and your TDS ratio is one of the primary tools lenders use when reviewing a mortgage application. It includes:
- Your monthly housing costs (mortgage principal and interest, property taxes, condo fees, HOA fees, and heating)
- All other monthly debt payments (such as credit cards, car loans, student loans, or lines of credit)
These total monthly obligations are then compared to your gross monthly income—your income before taxes and deductions.
Lenders use this ratio to ensure you can manage both your mortgage and other debt payments without financial strain. A lower ratio means you’re using a smaller portion of your income on debt, which signals to lenders that you’re a lower-risk borrower.
Why Does the TDS Ratio Matter in the Mortgage Process?
Your TDS ratio plays a major role in determining your mortgage eligibility and how much a lender is willing to approve.
Here’s why it’s important:
- Risk assessment: Lenders use the TDS ratio to evaluate how much debt you’re currently managing compared to your income.
- Mortgage approval: Most lenders in Canada follow CMHC guidelines, which recommend a maximum TDS ratio of 44%.
- Affordability check: Your TDS ratio helps both you and the lender assess what price range is financially comfortable.
- Rate qualification: Borrowers with lower TDS ratios may sometimes qualify for more favourable interest rates.
If your TDS ratio is too high, it may limit your options or require you to adjust your expectations in terms of home price or mortgage size.
How to Calculate TDS Ratio
Start with your gross monthly income (before taxes). Then total your monthly housing costs—this includes mortgage principal and interest, property taxes, heating, HOA fees, and half of any condo fees. Add in your regular debt payments like credit cards, car loans, or other lines of credit.
Use this formula: TDS Ratio = (Monthly Housing Costs + Monthly Debt Payments) ÷ Gross Monthly Income × 100
Example Calculation
If you earn $6,000/month, and your expenses are:
- Mortgage: $1,600
- Property taxes: $300
- Heating: $100
- Car loan: $400
- Credit card: $150
TDS = ($1,600 + $300 + $100 + $400 + $150) ÷ $6,000 × 100 = 42.5%
In this case, your TDS ratio is 42.5%, which is just under the typical maximum limit of 44%. Knowing this number can help you understand your financial readiness for a mortgage.
The mortgage payment is based on the Bank of Canada’s stress test. What this means is borrowers must be approved for their interest rate offered by their lenders plus 2%.
What Is a Good TDS Ratio?
Most Canadian lenders prefer a TDS ratio of 42% or lower, though some may allow up to 44% under insured mortgage rules.
- Below 36% – Excellent: Indicates low financial stress and high affordability.
- 36%–42% – Acceptable: Most borrowers in this range qualify with stable income and decent credit.
- Above 44% – Risky: May need to reduce debt, increase income, or find a co-signer.
If your TDS ratio is higher than recommended, it doesn’t necessarily mean you can’t get a mortgage—but it may require some adjustments to your finances or expectations.
How to Improve Your TDS Ratio
Improving your TDS ratio is often possible with a few financial adjustments. Here are some strategies:
1. Reduce Existing Debt
Paying off credit cards, loans, or lines of credit can lower your monthly obligations, and in turn, your TDS ratio.
2. Increase Your Income
A second job, freelance income, or including a co-applicant’s income can help improve your gross monthly income, thereby reducing your TDS percentage.
3. Lower Your Housing Costs
Consider a less expensive home, or extend your amortization period to reduce monthly payments. You can also explore options like shared ownership or government programs for first-time buyers.
4. Consolidate Debts
Combining multiple high-interest debts into one lower-interest loan can reduce monthly payments and simplify your finances.
5. Work with a Mortgage Broker
A qualified broker can offer personalized advice and help you access lenders who are more flexible with their lending guidelines.
Need Help with your Mortgage Journey?
Your Total Debt Service (TDS) ratio is one of the most important numbers in your mortgage journey. It gives lenders a clear picture of your financial health and helps ensure that you’re not taking on more than you can afford.
Whether you’re a first-time buyer or looking to refinance, understanding how your TDS ratio is calculated, and what you can do to improve it, can make a big difference.
Here at Mortgage Connection, we work with clients all across Canada, including Calgary, AB; Thunder Bay, ON; North Saanich, BC; and Saskatoon, SK, to help them understand their finances and secure the right mortgage for their needs. If you’re unsure where you stand or want help improving your TDS ratio, contact our experienced brokers today!
