If you’ve ever applied for a mortgage or a loan and gotten turned down even though your income seems solid it can be frustrating. What’s even more frustrating is when you’re told it’s because of your “debt ratio.”
One of the key numbers lenders use to judge your ability to repay is something called the Total Debt Service (TDS) ratio. But most people don’t know what it is, how it’s calculated, or how it affects their loan approval.
And if you’re trying to buy a home, get a line of credit, or refinance your mortgage, not understanding TDS could be the reason you’re missing out on great deals or any deal at all.
Why It’s a Big Deal for Borrowers
Let’s say you make decent money and think you’re in good financial shape. But then a lender looks at your application and says your TDS ratio is too high. Suddenly, you’re left wondering:
- What’s included in that calculation?
- How high is too high?
- What can I do to fix it?
Not knowing these answers can lead to unnecessary rejections, higher interest rates, or smaller loan amounts than you need.
That’s why understanding the TDS ratio is critical because it tells lenders how much of your income is already committed to paying off debts.
What Is the Total Debt Service (TDS) Ratio?
The Total Debt Service ratio is a financial metric that lenders use to measure how much of your gross income goes toward debt payments.
It includes your housing costs (like your mortgage, property taxes, and heating) plus all your other monthly debt obligations like car payments, student loans, credit card minimums, and any other lines of credit.
It’s usually expressed as a percentage. The lower the percentage, the more breathing room you have. The higher it is, the more overextended you appear to lenders.
TDS Ratio Formula
Here’s the basic formula:
TDS Ratio = (Total Monthly Debt Payments / Gross Monthly Income) × 100
- Total Monthly Debt Payments = housing costs + other fixed debt payments
- Gross Monthly Income = income before taxes and deductions
Example Calculation
Let’s walk through an example.
Imagine you earn $6,000 per month before taxes.
Your monthly expenses:
- Mortgage payment (including property tax and heating): $2,000
- Car loan: $450
- Student loan: $300
- Credit card minimum: $100
Total monthly debt payments = $2,000 + $450 + $300 + $100 = $2,850
Now plug it into the formula:
TDS Ratio = ($2,850 / $6,000) × 100 = 47.5%
That means nearly half of your income is already committed to debt. For many lenders, that’s a red flag.
Why Lenders Care
The TDS ratio helps lenders decide how risky you are as a borrower. If too much of your income is already tied up, they worry you won’t have enough left to cover the new loan payments.
In general:
- A TDS ratio below 40% is considered healthy.
- Anything above 44% can raise red flags, depending on the lender and the loan type.
Every lender has its own limits, but staying under 40% is usually a safe target.
What’s Included in the TDS Ratio?
Understanding what goes into your Total Debt Service ratio can make a huge difference when applying for a loan. Lenders want to know how much of your income is already spoken for by fixed debt payments. Here’s how they break it down:
Included:
- Mortgage or rent payments: This is the biggest chunk for most people. If you own your home, it includes your mortgage principal, interest, property tax, and heating costs. If you rent, your monthly rent counts.
- Property taxes: If you own a home, lenders factor in your annual property taxes divided into monthly amounts, since it’s an ongoing financial obligation.
- Heating costs (for mortgages): Especially in colder regions, heating expenses are factored in for homeownership calculations, since they’re predictable and essential.
- Minimum credit card payments: Even if you pay off your balance every month, lenders assume you’ll only make the minimum. That’s what gets counted in your TDS.
- Auto loans: Any monthly payment tied to a car loan or vehicle financing gets included.
- Student loans: Whether federal or private, if you have a student loan payment, it’s factored in.
- Personal or consolidation loans: These fixed monthly payments regardless of how you used the money get added into your debt total.
- Lines of credit: If you’ve drawn from a line of credit, lenders include the interest or required minimum payments, even if you’re not using the full amount.
- Spousal/child support obligations: If you have court-ordered payments for spousal or child support, those are considered recurring debts and get included too.
Not included:
- Groceries: While food is a big part of your budget, it’s not counted because it varies month to month and isn’t a fixed repayment obligation.
- Utilities: Gas, electricity, water, internet these are necessary, but they’re not fixed debts backed by contracts or repayment schedules.
- Transportation (gas, insurance): Even though you likely pay for gas and insurance regularly, they’re considered variable expenses.
- Entertainment or dining out: Subscriptions, movie nights, restaurant these fall into the lifestyle category, not fixed obligations.
- Retirement savings contributions: Even if you regularly contribute to a 401(k) or RRSP, lenders don’t include these because they’re technically optional.
In short, the TDS ratio is about how much of your income is already legally committed to fixed debts. Everyday spending doesn’t count only recurring monthly payments that you must make.
TDS vs. GDS: What’s the Difference?
You might also hear about the Gross Debt Service (GDS) ratio. This one only includes housing-related costs like your mortgage, property taxes, and heating.
TDS includes everything in GDS plus your other debts.
GDS = (Housing Costs / Gross Income) × 100 TDS = (Housing + Other Debts) / Gross Income × 100
Lenders often look at both, but TDS gives a fuller picture of your financial obligations.
How to Lower Your TDS Ratio
If your TDS ratio is higher than what lenders prefer, don’t panic there are practical ways to bring it down and boost your chances of getting approved.
1. Pay down high-interest debt Start by tackling credit cards and personal loans. These often come with higher interest rates and higher minimum payments. By reducing these balances, you’ll directly lower your monthly obligations and improve your TDS ratio.
2. Consolidate your loans If you have multiple loans with varying payments, consolidating them into a single loan with a lower interest rate can reduce your monthly payment. This streamlines your debt and can bring your TDS ratio down significantly.
3. Increase your income This might not be an overnight fix, but even a part-time job, freelance gig, or side hustle can make a difference. Since the TDS ratio is based on your gross income, every extra dollar you earn works in your favor.
4. Delay major purchases Thinking about financing a new car or taking on another loan? Hold off if you’re planning to apply for a mortgage or large loan soon. Keeping your debt levels low ahead of your application helps present you as a more stable borrower.
5. Add a co-signer or co-borrower If someone else like a spouse or family member has steady income and little debt, adding them to your application can improve your ratio. Their income gets included in the calculation, which can help you qualify for a better loan or rate.
How Low Should My TDS Be for a Mortgage?
When applying for a mortgage, your TDS ratio plays a major role in how much you can borrow and whether you’ll be approved at all. So how low should it be?
Most lenders prefer to see your TDS ratio under 40%. This tells them you’re not over-extended and still have room in your income to handle future payments. Ideally, if you can keep your TDS around 35% or lower, you’ll put yourself in a stronger position to qualify for the best loan terms.
In some cases, lenders may accept a TDS as high as 44%, especially if you have a high credit score, a large down payment, or significant assets.
But once your ratio starts creeping above that level, your options shrink quickly and you could face higher interest rates, lower loan amounts, or outright rejection.
The sweet spot? Keep your TDS under 40%, and you’ll meet most lender requirements comfortably.
What Is the Difference Between TDS (Total Debt Service) and GDS (Gross Debt Service)?
TDS (Total Debt Service) and GDS (Gross Debt Service) are two key ratios lenders use to evaluate your financial health when you apply for a mortgage. While they sound similar, they measure different things:
GDS (Gross Debt Service) Ratio only looks at your housing costs. That includes your mortgage payments, property taxes, heating costs, and sometimes condo fees if they apply. It gives lenders an idea of how much of your income is committed just to keeping a roof over your head.
TDS (Total Debt Service) Ratio takes it a step further. It includes everything from the GDS calculation, plus your other debt payments like car loans, student loans, credit card minimums, personal loans, and more.
So, while the GDS ratio shows how much your home will cost you monthly, the TDS ratio shows how much of your income is going toward all your recurring debt.
Lenders use both to understand how stretched your finances are and to decide if you can realistically afford a new loan. Keeping both numbers in a healthy range improves your chances of approval and better terms.
Final Thoughts
Your Total Debt Service ratio is more than just a number it’s one of the key metrics that decides whether you get a mortgage, how much you qualify for, and even what interest rate you’re offered.
Understanding how it works gives you control. It lets you make smarter choices before applying for credit and helps you avoid rejection surprises.
If you’re planning to buy a home, refinance, or take out a big loan, check your TDS ratio early. If it’s too high, start working to bring it down. Or contact Us
Because when it comes to borrowing, the numbers speak louder than anything else and your TDS ratio tells lenders a lot about what you can handle.