Imagine your monthly pay, before tax, is 100 coins. The bank checks how many of them would go to your home and your debts.
- Home costs: up to 39 of the 100 coins (GDS)
- Home costs plus other debts: up to 44 coins in total (TDS)
- The rest is for everything else: food, savings, fun
- GDS counts the coins for your home: your mortgage payment, property tax, heating, and half of any condo fees. For insured mortgages, that can be at most 39 coins out of 100 (39%)1.
- TDS counts the home coins plus the coins for your other debts, like car loans, credit cards and student loans. That can be at most 44 coins (44%)1.
If either number is too big, the bank lends you less.
The stress test
The bank also pretends your rate is higher than it really is: your rate plus 2%, or 5.25%, whichever is higher1. If you could still afford it, you pass. That way you'd be okay if rates went up.
The formulas, for the curious
GDS = (mortgage payment + property tax + heating + 50% of condo fees) ÷ monthly pay before tax TDS = (those home costs + other monthly debt payments) ÷ monthly pay before taxTo try it, the affordability calculator shows the most you could borrow, and the income calculator shows the pay you'd need for a particular home.