A client has a gross annual income of $80,000 and monthly debt payments of $500. Using a 32% gross debt service ratio, what is their maximum allowable monthly housing payment?

Q: What is the correct answer to: A client has a gross annual income of $80,000 and monthly debt payments of $500. Using a 32% gross debt service ratio, what is their maximum allowable monthly housing payment?

The correct answer is $2,133. Option B ($2,133) correctly applies the 32% gross debt service ratio calculation. The client's gross annual income of $80,000 divided by 12 months equals $6,667 monthly gross income. Multiplying this by the 32% GDS ratio limit ($6,667 × 0.32) gives exactly $2,133. This represents the maximum allowable monthly housing payment under standard Canadian lending guidelines, which typically cap housing costs at 32% of gross monthly income.

Q: What background knowledge is needed for this Mortgage & Real Estate Finance question?

Gross Debt Service (GDS) ratio is a key mortgage qualification metric used by Canadian lenders to assess borrower capacity. It measures housing costs (principal, interest, taxes, heating - PITH) as a percentage of gross monthly income. The standard maximum is 32%, though some lenders may vary slightly. This differs from Total Debt Service (TDS) ratio, which includes all debt payments and is typically capped at 40%. These ratios are fundamental to OSFI guidelines and provincial lending regulations, ensuring responsible lending practices across Canada's financial institutions.

Q: What is a good way to remember the answer to this Mortgage & Real Estate Finance question?

Remember 'PITH-y 32' - housing costs (Principal, Interest, Taxes, Heating) should be PITHy (concise) at maximum 32% of gross income. Think of it as keeping housing costs in the 'first third' of your income. When you see GDS ratio questions, immediately think 'PITH-y 32' - convert annual to monthly income, then multiply by 0.32. The existing debt payments are irrelevant for GDS calculations.

Q: What exam tip applies to this Mortgage & Real Estate Finance question?

For GDS ratio questions: 1) Convert annual income to monthly (÷12), 2) Multiply by 0.32, 3) Ignore existing debt payments (that's for TDS ratio). Always double-check your decimal placement.

Q: How does this Mortgage & Real Estate Finance concept apply in real world practice?

A real estate agent is working with first-time buyers earning $80,000 annually. Before showing properties, the agent calculates their maximum housing budget using the 32% GDS ratio, determining they can afford up to $2,133 monthly for PITH costs. This helps narrow the property search to homes with total monthly costs within this limit, ensuring the clients can qualify for financing and avoiding disappointment from viewing unaffordable properties.

Question

Mortgage & Real Estate FinanceQualification RatiosMEDIUM

A client has a gross annual income of $80,000 and monthly debt payments of $500. Using a 32% gross debt service ratio, what is their maximum allowable monthly housing payment?

Answer Options

A

$1,767

B

$2,133

C

$2,267

D

$2,633