Posted On Feb 20, 2025

For years, Canada’s mortgage approval guidelines have been based on two key metrics: the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios, which were set at 39% and 44% respectively back in 2012. These numbers were designed to protect borrowers from overextending themselves financially. But with today’s economic shifts, it’s time to ask: do these benchmarks still hold up?

While the mortgage Stress Test (introduced in 2018) adds an extra layer of protection by ensuring borrowers can handle interest rate hikes, it doesn't fully account for the rising costs of living that affect homebuyers' overall affordability. Let’s take a closer look at how these changes impact you.

Breaking Down GDS, TDS, and the Mortgage Stress Test

First, let's define the terms:

  • GDS Ratio: This measures the portion of your gross income spent on housing expenses like mortgage payments, property taxes, heating, and condo fees (if applicable).

  • TDS Ratio: This includes your GDS expenses plus other debt obligations such as car loans and credit card payments.

  • The Mortgage Stress Test: This test ensures that borrowers qualify for a mortgage at a rate 2% higher than their current rate (or the Bank of Canada’s five-year benchmark rate, whichever is higher), to protect against rising interest rates.

While the stress test helps safeguard against rate hikes, it doesn’t factor in the increasing costs of utilities, groceries, and transportation, which are crucial to understanding real affordability.

How Have Things Changed Since 2012?

Let’s compare the state of the economy then and now:

  • Income Levels: In 2012, the median household income was around $74,000. Today, it’s around $100,000—about a 35% increase.

  • Housing Costs: According to the Canadian Real Estate Association (CREA), the national average home price in 2012 was about $365,000, rising to around $730,000 today—a roughly 100% increase. Meanwhile, in the Greater Toronto Area (GTA), average home prices have climbed from about $500,000 in 2012 to over $1,000,000 now, indicating an even sharper jump.

  • Rising Living Expenses: The costs of everyday essentials like food, transportation, and utilities have increased significantly, but we’ll need more up-to-date data for precise figures.

Are the GDS/TDS Limits Still Adequate?

When the GDS/TDS ratios were set, they were deemed sufficient to protect borrowers. But with today’s market realities, these benchmarks might not be enough:

  1. Higher Housing Costs: With home prices doubling, the portion of income needed to cover mortgage payments has skyrocketed, leaving less for other living expenses.

  2. Other Rising Costs: After covering housing, borrowers are left to stretch their income to cover essentials like groceries and transportation—costs that the stress test doesn’t account for.

  3. Income vs. Inflation: While wages have risen, they haven’t kept pace with inflation, making it harder for buyers to maintain financial stability.

Should GDS/TDS Ratios Be Adjusted?

To reflect today’s financial landscape, adjusting the GDS to 34% and TDS to 39% could help provide a better safety net. These new limits would give borrowers more breathing room by accounting for the growing costs outside of housing. However, such adjustments could result in fewer people qualifying for a mortgage—something many prospective buyers might not want to hear.

Tips for Borrowers in the GTA

What to Do:

  • Aim for Lower Ratios: Consider keeping your GDS and TDS ratios below the maximum allowed. This could mean opting for a more affordable property or broadening your search area. Think “drive until you qualify comfortably” rather than just “drive until you qualify.”

  • Plan for the Big Picture: When budgeting, think beyond the numbers on the stress test. Factor in everything from utilities to gas to groceries. Your mortgage professional can help model this into your application so you can understand what you can comfortably afford.

  • Consult a Mortgage Agent: Get personalized advice that factors in both your current situation and long-term goals. They’ll help you make informed decisions that work for you now and in the future.

What to Avoid:

  • Don’t Count on Future Raises: It's easy to get caught up in hoping for higher wages, but it’s crucial to base your budget on what you’re earning today.

  • Avoid Minimal Down Payments: The more you can put down upfront, the less you’ll need to borrow—and that means lower monthly payments.

  • Ignoring Rising Costs: As the cost of living continues to climb, it's important to adapt your budget regularly to avoid financial strain.

Conclusion

The GDS and TDS ratios that worked in 2012 no longer reflect the economic reality of today’s homebuyers. With skyrocketing housing prices and everyday expenses on the rise, it’s crucial to rethink how much home you can afford. Borrowing smart means planning for the long term and making sure your budget can handle more than just your mortgage. By staying realistic and borrowing within your means, you’ll enjoy sustainable homeownership, no matter what the future holds.

 

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