What is the purpose of the Gross Debt Service Ratio (GDS)?

The purpose of the Gross Debt Service Ratio (GDS) is to calculate housing costs as a percentage of income. This ratio is specifically designed to gauge how much of a borrower’s gross monthly income goes towards housing-related expenses, which typically include mortgage payments, property taxes, and heating costs. By determining this percentage, lenders can assess whether a potential borrower can afford the housing costs associated with a mortgage.

Estimating the GDS helps lenders ensure that borrowers are not overextending themselves financially, which could lead to difficulty in making mortgage payments. Most lenders prefer a GDS ratio below a certain threshold, often around 32% to 40%, to minimize their financial risk. This metric is crucial in the lending process, as it helps establish a balance between a borrower's income and their housing expenses, providing a clearer picture of the borrower’s financial capability in terms of housing affordability.