How Much House Can You Afford? GDS, TDS and the Stress Test Explained

Before you start viewing homes, it helps to know the number a lender is likely to approve, and the number you are comfortable with, which are not always the same. Here is how Canadian lenders work out what you can borrow, in plain terms.

The short version

GDS: your housing costs

Your gross debt service ratio is the share of your gross household income needed for the home itself: mortgage principal and interest, property taxes and heating, plus half of any strata fees. For an insured mortgage, meaning a down payment under 20%, CMHC's limit is 39%.

TDS: everything you owe

Your total debt service ratio adds your other debt payments to those housing costs: car loans, credit cards, lines of credit, student loans and so on. CMHC's limit for insured mortgages is 44%.

A quick example

Say your household earns $150,000 a year before tax.

• GDS limit. 39% of $150,000 is $58,500 a year, or $4,875 a month for housing costs.
• TDS limit. 44% is $66,000 a year, or $5,500 a month for housing costs and all other debts combined.
• With a $600 car payment, $4,900 is left for housing under the TDS limit, so the GDS limit of $4,875 still decides.
• With $1,200 a month in other debts, only $4,300 is left for housing, so the TDS limit, not the GDS limit, now decides.

Paying down a car loan or credit card before you apply can make a real difference to what you qualify for.

The stress test

Lenders calculate those ratios at a qualifying rate, not just your actual rate. For both insured and uninsured mortgages, you must qualify at the higher of 5.25% or your mortgage contract rate plus 2%. Since November 21, 2024, if you have an uninsured mortgage and switch lenders at renewal without borrowing more, you do not have to requalify under the stress test.

If you put down 20% or more

With 20% or more down, your mortgage does not need default insurance, and CMHC's ratio limits do not apply. Lenders set their own debt service limits for these mortgages, so the numbers can vary from one lender to another. The stress test still applies.

Down payment and closing costs

• Minimum down payment. 5% of the first $500,000 and 10% of the portion above that, for homes under $1.5 million. Homes of $1.5 million or more need 20% down.
• Closing costs. The Financial Consumer Agency of Canada suggests budgeting 1.5% to 4% of the purchase price for costs like legal fees, a home inspection, title insurance and property tax adjustments.
• Property transfer tax. In BC, make sure this is in your numbers too: 1% on the first $200,000, 2% on the portion up to $2 million and 3% above that, plus a further 2% on the residential portion over $3 million, unless you qualify for an exemption.

I cover the first-time buyer exemptions and savings programs in First-Time Home Buyer Programs in BC.

Approved is not the same as comfortable

The ratios tell you the most a lender will allow, not what will feel comfortable month to month. Before you set your budget, think about strata fees, maintenance, insurance, childcare, savings and the life you want around your home. A mortgage that leaves you room to breathe is usually the better choice.

Questions buyers often ask me

What are GDS and TDS ratios?

GDS is the share of your gross income needed for housing costs: mortgage payments, property taxes, heating and half of any strata fees. TDS adds your other debt payments. For insured mortgages, CMHC limits them to 39% and 44%.

What rate do I have to qualify at?

The higher of 5.25% or your mortgage contract rate plus 2%. This applies to both insured and uninsured mortgages.

Do strata fees count toward my GDS ratio?

Yes. For insured mortgages, half of the strata fees are included in the GDS calculation.

How much should I budget for closing costs?

The Financial Consumer Agency of Canada suggests 1.5% to 4% of the purchase price. In BC, also budget for property transfer tax unless you qualify for an exemption.

Do I have to pass the stress test again when I renew?

If you stay with your lender, generally no. Since November 21, 2024, borrowers with uninsured mortgages who switch lenders at renewal without borrowing more are also exempt.

Ready for the next step? Get pre-approved, try my mortgage calculator, and read what interest rates mean for buyers in Greater Vancouver and the Fraser Valley.

This article is general information, not financial advice, and your lender makes the final decision. For CMHC's definitions, see calculating GDS and TDS.