A client has a gross annual income of $80,000 and monthly debt payments of $600. Using a 32% Gross Debt Service (GDS) ratio, what is the maximum monthly housing payment they can afford?

Q: What is the correct answer to: A client has a gross annual income of $80,000 and monthly debt payments of $600. Using a 32% Gross Debt Service (GDS) ratio, what is the maximum monthly housing payment they can afford?

The correct answer is $2,133. Option C ($2,133) is correct because it properly applies the 32% GDS ratio calculation. With a gross annual income of $80,000, the monthly gross income is $6,667 ($80,000 ÷ 12). The maximum housing payment under a 32% GDS ratio is calculated as $6,667 × 0.32 = $2,133. The existing monthly debt payments of $600 are irrelevant to the GDS calculation, which only considers housing costs as a percentage of gross income. This aligns with standard Canadian lending practices where GDS and TDS are calculated separately.

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

The Gross Debt Service (GDS) ratio is a key mortgage qualification metric used by Canadian lenders to assess borrower capacity. It calculates housing costs (mortgage payments, property taxes, heating, and 50% of condo fees) as a percentage of gross monthly income. The standard maximum is typically 32% for conventional mortgages. This differs from the Total Debt Service (TDS) ratio, which includes all debt payments and is usually capped at 40-44%. These ratios are mandated by federal banking regulations and CMHC guidelines. Real estate professionals must understand these calculations to properly qualify clients and provide accurate purchase price guidance, ensuring compliance with professional licensing requirements under provincial legislation.

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

Remember 'GDS = Gross × 32%' - think of it as 'Gross Dollars for Shelter equals Gross income times 32%'. Visualize a pie chart where housing takes up about one-third (32%) of your gross income pie, with existing debts being a separate consideration entirely. When you see GDS questions, immediately identify the gross monthly income, multiply by 0.32, and ignore any existing debt payments mentioned. The debt payments are red herrings for GDS calculations - they only matter for TDS calculations.

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

For GDS calculations, convert annual income to monthly (÷12), multiply by the given percentage (typically 32%), and ignore existing debt payments. Remember: GDS = housing only, TDS = housing + all debts.

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

A real estate agent is working with first-time buyers who earn $80,000 annually and have $600 in monthly car and credit card payments. 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 mortgage, taxes, and utilities. This helps narrow the property search to homes priced appropriately for their income level, preventing disappointment and ensuring mortgage pre-approval success. The agent explains that while their existing debts will be considered in the final mortgage approval (TDS calculation), the initial housing budget is based solely on the GDS ratio.

Question

Mortgage & Real Estate FinanceQualification RatiosMEDIUM

A client has a gross annual income of $80,000 and monthly debt payments of $600. Using a 32% Gross Debt Service (GDS) ratio, what is the maximum monthly housing payment they can afford?

Answer Options

A

$1,533

B

$1,733

C

$2,133

D

$2,533