Debt-to-income ratio and how much you can borrow

Your debt-to-income ratio compares your monthly debt payments to your gross monthly income: it’s one of the main criteria Canadian lenders use to decide how much you can borrow. As a guideline, a ratio under roughly 35% to 40% is generally viewed favourably, but each lender applies its own thresholds. The lower your ratio, the greater your borrowing capacity — and the better your chances of getting good terms.

What is the debt-to-income ratio?

The debt-to-income ratio is simply the share of your gross income already committed to repaying your debts. You calculate it by dividing your monthly debt payments by your gross monthly income, then multiplying by 100.

On the payments side, lenders generally include:

• loan payments (car, student, personal loan);
• the minimum payment on your credit cards;
• payments on a line of credit;
• often, rent or mortgage payments;
• support payments, where applicable.

On the income side, it’s your gross income — before taxes and deductions: salary, documented self-employment income, pensions or other regular income.

The GDS and TDS ratios, mortgage cousins

For mortgages, lenders use two more precise versions of the same concept: the gross debt service (GDS) ratio and the total debt service (TDS) ratio.

• The GDS counts only housing costs: mortgage payment, property taxes, heating and, where applicable, a portion of condo fees.
• The TDS adds all your other debts on top of those costs: loans, cards, lines of credit.

Commonly used benchmarks in Canada sit around 39% for GDS and 44% for TDS, but these are guideline figures: each institution sets its own limits based on your profile. For a personal loan, most lenders simply use an overall debt-to-income ratio, without separating housing from the rest.

How to calculate your ratio

Three steps give you an honest estimate:

1. Add up your monthly debt payments: loans, minimum card payments, lines of credit, and include your rent or mortgage to stay on the safe side.
2. Establish your gross monthly income (before taxes). If your income varies, use an average of recent months.
3. Divide the first by the second, then multiply by 100.

An illustrative example: you earn $4,500 gross per month. Your rent is $1,300, your car loan $350 and your minimum card payments $150, for a total of $1,800. Your ratio is therefore $1,800 ÷ $4,500 = 40%. A new loan costing $300 a month would push it to about 47% — a level many lenders would consider too high.

Typical thresholds, as guidance only

There is no single official threshold in Canada, but these ranges give you an order of magnitude:

• Under 35%: generally a comfortable profile; your ratio shouldn’t hold back your application.
• 35% to 40%: caution zone; many lenders still approve, sometimes with a reduced amount.
• Above 40% to 45%: refusals become frequent, or offers are limited to small amounts at high rates.

Remember that the ratio is only one criterion among others: your credit score with Equifax or TransUnion, the stability of your income and your payment history carry just as much weight in the decision.

How to improve your ratio before applying

The good news: the debt-to-income ratio responds quickly to your actions, unlike a credit score, which evolves slowly.

• Pay off small balances first. Eliminating a debt removes its entire monthly payment from the calculation, even if the balance was modest.
• Reduce your credit card balances. The minimum payment drops with the balance, which directly lightens your ratio.
• Consolidate your expensive debts. A debt consolidation loan can replace several payments with a single, often lower, payment.
• Document all your income. Side income, self-employment or pension: higher proven income lowers the ratio without repaying a cent.
• Avoid any new debt in the months before your application, including “interest-free” in-store financing, which counts as a mandatory payment.

Next steps

Calculate your ratio now, before you even start shopping for a loan: you’ll know whether the timing is right or whether it’s better to pay down a few balances first. Then compare several lenders — banks, credit unions and online lenders apply neither the same thresholds nor the same rates for an identical profile. All figures in this guide are illustrative: only an application assessed by the lender determines your actual offer.