Humber/Ontario Real Estate Course 4 Exam Practice

Calculate the Gross Debt Service (GDS) ratio based on an income of $45,000 and monthly mortgage and property tax payments of $1,200.

1. 27%

2. 32%

3. 31%

4. 35%

5. 29%

6. 30%

The correct answer is: 32%

To calculate the Gross Debt Service (GDS) ratio, you need to determine the total annual housing costs as a percentage of the gross annual income. The formula for the GDS ratio is: GDS Ratio = (Total Housing Costs / Gross Annual Income) x 100 In this scenario, the monthly mortgage and property tax payments are $1,200. To find the annual housing costs, multiply the monthly payment by 12: Annual Housing Costs = $1,200 x 12 = $14,400 Next, the gross annual income is given as $45,000. Now, substitute the values into the GDS formula: GDS Ratio = ($14,400 / $45,000) x 100 Calculating this gives: GDS Ratio = 0.32 x 100 = 32% Thus, the GDS ratio is 32%. This value indicates that 32% of the gross income is being spent on housing costs, which is commonly used by lenders as a guideline for assessing an individual's ability to manage housing expenses. In many lending scenarios, a GDS ratio over a certain threshold, often around 32%, may signal potential risk for lenders, making it an important indicator in real estate finance