A client has a gross annual income of $80,000 and monthly debt payments of $600. What is their maximum allowable monthly housing costs using the Gross Debt Service (GDS) ratio of 32%?
Correct Answer
B) $2,133
GDS ratio allows housing costs up to 32% of gross monthly income. With $80,000 annual income ($6,667 monthly), 32% equals $2,133. The existing debt payments don't affect the GDS calculation, only the Total Debt Service (TDS) ratio.
Why This Is the Correct Answer
Option B ($2,133) correctly applies the GDS ratio calculation. With gross annual income of $80,000, the monthly gross income is $6,667 ($80,000 ÷ 12). The GDS ratio of 32% allows maximum housing costs of $2,133 ($6,667 × 0.32). Importantly, the existing monthly debt payments of $600 are irrelevant to GDS calculation, as GDS only considers housing-related expenses against gross income. The debt payments would factor into the Total Debt Service (TDS) ratio calculation, which is a separate affordability measure.
Why the Other Options Are Wrong
Option A: $1,733
Option A ($1,733) appears to incorrectly subtract the existing debt payments from the calculated GDS amount. This suggests confusion between GDS and TDS ratios. The calculation might be $2,133 - $400 = $1,733, but this is incorrect methodology as GDS doesn't consider existing debt obligations.
Option C: $2,400
Option C ($2,400) suggests using 36% instead of the stated 32% GDS ratio ($6,667 × 0.36 = $2,400). This confuses GDS with TDS ratio limits, as TDS is typically capped at 40-44%, but 36% isn't a standard threshold for either ratio in Canadian mortgage qualification.
Option D: $2,667
Option D ($2,667) represents 40% of gross monthly income ($6,667 × 0.40 = $2,667). This incorrectly applies the typical TDS ratio percentage to the GDS calculation. While 40% is a common TDS threshold, it's not the 32% GDS ratio specified in the question.
Deep Analysis of This Mortgage & Real Estate Finance Question
The Gross Debt Service (GDS) ratio is a fundamental mortgage qualification metric used by Canadian lenders to assess borrower capacity. It measures housing-related expenses as a percentage of gross monthly income, typically capped at 32% for conventional mortgages. This question tests understanding of GDS calculation methodology and its distinction from Total Debt Service (TDS) ratio. GDS includes principal, interest, taxes, heating, and 50% of condo fees (PITHC), but excludes other debt payments. The calculation requires converting annual income to monthly ($80,000 ÷ 12 = $6,667), then applying the 32% threshold ($6,667 × 0.32 = $2,133). This ratio is crucial for mortgage pre-approval and helps lenders comply with federal stress test requirements under OSFI guidelines. Understanding GDS versus TDS ratios is essential for real estate professionals advising clients on affordability and mortgage qualification.
Background Knowledge for Mortgage & Real Estate Finance
GDS (Gross Debt Service) and TDS (Total Debt Service) ratios are key mortgage qualification metrics in Canada. GDS measures housing costs (principal, interest, taxes, heating, 50% condo fees) against gross monthly income, typically limited to 32%. TDS includes GDS plus all other debt payments, usually capped at 40-44%. These ratios help lenders assess borrower capacity and comply with OSFI stress test requirements. Federal regulations under the Bank Act and provincial mortgage broker legislation require proper affordability assessment. Real estate professionals must understand these calculations to properly advise clients on purchasing power and mortgage pre-qualification requirements.
Memory Technique
The 32% GDS House RuleRemember 'GDS = Gross income × 32% = House money only.' Think of it as your 'house allowance' - like a monthly allowance that's exactly 32% of your gross pay, and it can ONLY be spent on housing costs. Other debts don't reduce this allowance, they're counted separately in TDS.
When you see GDS questions, immediately identify gross monthly income, multiply by 32% (or given percentage), and ignore any mention of other debts. If other debts are mentioned, the question is likely testing whether you confuse GDS with TDS.
Exam Tip for Mortgage & Real Estate Finance
For GDS calculations: convert annual income to monthly, multiply by the given percentage (usually 32%), and ignore existing debt payments. Only housing costs count toward GDS. If debt payments are mentioned, they're likely a distractor or the question involves TDS.
Real World Application in Mortgage & Real Estate Finance
A real estate agent is working with first-time buyers earning $80,000 annually with $600 monthly car and credit card payments. During pre-qualification, the agent explains that their maximum housing budget is $2,133 monthly based on the 32% GDS ratio, regardless of their existing debts. However, their total debt service (including the $600 existing payments plus housing costs) cannot exceed 40% of gross income ($2,667), meaning their actual maximum housing payment might be lower at $2,067 ($2,667 - $600) depending on lender TDS requirements.
Common Mistakes to Avoid on Mortgage & Real Estate Finance Questions
- •Subtracting existing debt payments from GDS calculation
- •Confusing GDS percentage (32%) with TDS percentage (40%)
- •Using annual income instead of converting to monthly income
Key Terms
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