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How to Calculate Gross Debt Service or GDS Ratio?

Raman Gakhal of Alberta Real Estate School explaining the meaning, use and various components of a Gross Debt Service (GDS) Ratio and how we can calculate it for a Mortgage application in Canada.

Today, we will understand what Gross Debt Service or GDS Ratio is and how to calculate the GDS Ratio in a mortgage application for a real estate property.

If you have ever applied for a Mortgage or have come across a Mortgage Professional, you must have heard of 2 main ratios – Gross Debt Service or GDS Ratio & Total Debt Service or TDS Ratio. Mortgage professionals use these 2 ratios to determine if borrowers can afford to pay off the mortgage for a specific real estate property that they are dealing with. GDS Ratio is thus, an essential indicator of mortgage affordability and approval.

If you are planning to become a Mortgage Professional, you need to understand what GDS and TDS are and how to calculate these ratios. For now, let’s understand the concept and calculation of GDS Ratio step-by-step.

First of all, let’s understand what are Debt Service Ratios?

So, what are Debt Service Ratios?

Debt Service Ratio (DSR) or Debt Service Coverage Ratio (DSCR) is used in the calculation of mortgage approval for a real estate property. It is a popular benchmark used in the measurement of an entity’s ability to produce enough cash to cover its debt payments, including repayment of principal and interest (on the mortgage) on both short-term and long-term debt. This ratio is often used when the entity applying for a mortgage has any borrowings on its account such as bonds, loans, or lines of credit.

It is also a commonly used ratio in a leveraged buyout transaction, to evaluate the debt capacity of the target company, along with other credit metrics such as total debt/EBITDA multiple, net debt/EBITDA multiple, interest coverage ratio, and fixed charge coverage ratio.

Thus, as we understood, there are 2 types of Debt Service Ratios:

  1. GDS (Gross Debt Service) Ratio
  2. TDS (Total Debt Service) Ratio

What is GDS Ratio?


GDS refers to Gross Debt Service Ratio. As we understood, it helps us determine whether a person or an entity is eligible for the intended amount of mortgage or not. GDS is the percentage of your monthly household income that covers your housing costs and not any other debts (unlike TDS). 

Maximum GDS Ratio limit for Mortgage Affordability and Approval in Canada.

Factors affecting GDS Ratio

The factors that affect GDS Ratio include:

  1. Principle Amount (P)
  2. Interest Rate (I)
  3. Taxes on the Property (T)
  4. Heating Costs (H)
  5. 50% Condominium Fees (If the property is a Condominium)

GDS Formula:

Now, let’s understand the calculation of GDS Ratio with some examples.

Sample Questions

Example 1

Jen and Jason Smith wish to purchase a house subject to financing. Their combined yearly gross income is $84,000. Their monthly mortgage payment is $1,250.75 which includes principal and interest. Their property taxes are $1800.00 for the year and the monthly heating costs are estimated at $100.00. Would the Smiths qualify for the mortgage?

The Variables are:

  1. Gross Household Monthly Income: $84,000/year = 84000/12 = $7000/month
  2. Mortgage Installment (Principal + Interest): $1,250.75/month
  3. Property Tax: $1800/year = 1800/12 = $150/month
  4. Heating Cost: $100/month

Calculation:

  1. Step 1: Total Monthly Housing Expenses  = PITH = $1250.75 + $150 + $100 = $1500.75
  2. Step 2: GDS = PITH / Gross Monthly Income = 1500.75 / 7000 = 0.21
GDS Calculation answer = 21%

In this example, the GDS Ratio is less than 39%. Therefore, the couple qualifies for the mortgage when applying the GDS Calculation.

Example 2

Carol is interested in purchasing a condominium property as an investment. She is an investment banker and her income is $120,000 per year. Carol’s monthly payment for the mortgage is $1,050 including principal and interest. The property taxes for the condo are $1200 for the year. Her monthly condominium fees are $200 per month. The monthly heating costs are estimated at $75.00 per month. Would Carol qualify for the mortgage?

The Variables are:

  1. Gross Household Monthly Income: $120,000/year = 120,000/12 = $10,000/month
  2. Mortgage Installment (Principal + Interest): $1,050.00/month
  3. Property Tax: $1200/year = 1200/12 = $100/month
  4. Heating Cost: $200/month
  5. Condo Fees: $75.00/month

Calculation:

  1. Step 1: Total Monthly Housing Expenses  = PITH = $1050 + $100 + $75 + $100 = $1,325.00
  2. Step 2: GDS = PITH / Gross Monthly Income = $1325.00 / 10,000 = 0.1325
GDS Calculation answer = 13.25%

In this example, the GDS Ratio is less than 39%. Therefore, the couple qualifies for the mortgage when applying the GDS Calculation.

So, this was GDS Calculation for you guys. Stick around for more of such calculations and mortgage related topics.

We also have other important videos including where we share a glimpse of our Training Sessions. One of them is – How to Calculate Vacancy Rate and Occupancy Rate. Check it out here!

Get our Focused Study Guides, Exclusive Video Courses and “In-demand” Tutoring Sessions to get you through the Real Estate Exams on the first attempt!

Get in touch with at 587.936.7779 or support@albertarealestateschool.com.

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5 Most Important Types of Mortgage

Raman Gakhal, the Real Estate Tutor from Alberta Real Estate School has explained in detail about the 5 most impportant types of mortgages and their specifications in detail.

Before, going deep into the types of mortgage, first let’s understand what is a mortgage? A mortgage can be defined as –

The pledging of Real Property to a Creditor/Lender as security for a debt.

It is a financial agreement that helps people buy real property by borrowing large sum of money (debt) in exchange of a security.

There are two main parties involved in a mortgage agreement. They are:

  1. Lender (Mortgagee) – Who lends the money or mortgage
  2. Borrower (Mortgagor) – Who borrows the money or mortgage

Our previous video on what to expect in the mortgage brokerage exam helped many of our viewers understand the expectations of the mortgage brokerage exam. We also summarized Exam Weightings for Fundamentals of Mortgage Brokerage Course that helped people know the breakdown of marks based on the various units.

Passing a Mortgage Brokerage Exam is very tough for people as it includes a thorough understanding of the mortgage types and its processes. For e.g., there are more than 14 types of Mortgage in Canada that are available. Each borrower is different and has their own set of needs and requirements.

Now, we want you to focus on the concepts. To give you a brief idea, we have come up with the 5 Most Important Mortgage Types. If you are planning to become a Mortgage Broker, then you should know these 5 Mortgage Types and what they mean.

If you want to get the video version of the blog, click on the YouTube link below –

5 Important Types of Mortgage

1. Fixed Rate Mortgage (FRM)

A Fixed Rate Mortgage (FRM) is a loan where the interest rate is fixed for the full term of the mortgage. With this type of mortgage, The mortgage payments stay the same over the entire term of the mortgage. This information provides the borrower with the security of precisely knowing the amount of each mortgage payment allocated to paying the interest portion and outstanding principal balance.

In the initial years of the mortgage, more of the payments go towards paying the interest than the principal balance remaining. Therefore, the length of time to pay off the mortgage takes longer. In order to compensate the lender for any rise in market interest rates during the term of the mortgage, the interest rate is higher on a fixed rate mortgage than the rate on a comparable variable rate mortgage.

Plus, this means that the longer the term of the fixed rate mortgage, the longer is the security borrower gets from unexpected market changes. This enables higher interest rates for fixed rate mortgages with longer terms.

2. Variable Rate Mortgage (VRM)

A Variable Rate Mortgage (VRM) is the exact opposite of the Fixed Rate Mortgage. It is a loan with an interest rate that may change (float) periodically during the term of the mortgage. The interest rate of the mortgage fluctuates with changes in market interest rates, which is typically the lender’s prime rate.

Most people hesitate to take this type of mortgage as the rate of interest can keep fluctuating which gives a level of uncertainty and risk in their financial plan.

People with loose cash in hand after monthly expenses i.e., tight monthly budgets, unstable or temporary jobs, as well as those who like security and certainty of mortgage payments prefer fixed mortgages over variable mortgages.

Because it involves uncertainty and change in the interest rates with this type of mortgage, the rates are comparatively lower as opposed to that of the fixed mortgage rates.

People with higher financial credibility and job security prefer the variable type of mortgage.

3. Open Mortgage

An Open Mortgage allows the borrower to repay all or part of the principal amount at any time of the mortgage term without notice, penalty, or extra charges.

The faster and bigger the mortgage payments are made, the earlier the loan can be repaid. It can thus prove as a disadvantage for the lender. Thus, to make things even for the lender and the borrower, open mortgages typically have shorter terms and carry higher interest rates to compensate for their increased payment flexibility.

People with higher income inflow typically prefer this, to pay out the mortgage as soon as possible.

4. Closed Mortgage

A Closed Mortgage is the opposite of the Open Mortgages. They lock the borrower in to the interest rate and features of that mortgage for the entire term. Options for payout may be limited and typically incur penalties.

While there is less prepayment flexibility with a closed mortgage, most lenders offer some form of prepayment privileges as well as lower interest rates as the mortgage term is typically higher than that of the open mortgage types.

5. Assumable Mortgage

We can have properties on sale that still have their mortgage to be paid off. If a buyer purchases a property with an existing mortgage (ongoing with the seller) on it as part of his or her purchase agreement, he or she may assume that mortgage. This means the buyer takes possession of the property and assumes the obligations and payments under the existing mortgage.

There may be advantages for the buyer in such a practice. It might be that the interest rate on the existing mortgage can be lower than that of the current rates.

These are some of the basic types of mortgage that are used in general practice. There are many other different types of mortgage that will be covered in the later videos.

Learn about the Most Important Topic in Real Estate Studies – DOWER ACT

Stick out for other real estate topics. We are glad that we are able to help you in your Real Estate Exam Preparations in some or the other way. 

Join Alberta Real Estate School for expert help with understanding the concepts of Real Estate and getting uncommon and detailed tutoring sessions personalized as per your needs. Get our personalized Notes designed to get you through the Real Estate Exams in the first attempt! Visit our list of Real Estate Tutoring Sessions for details.

If you have any doubts for Exam Preparation of any of the real estate courses or topics, reach out to us directly at 587.936.7779.

Happy Studying!

We hope you found this information useful. You can also listen to this blog on the Podcast Channel below. Stick to us for our latest updates.

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What to Expect in the Mortgage Brokerage Exam in Alberta?

Raman Gakhal of Alberta Real Estate School asking with a smile, what to expect in the Mortgage Brokerage Exam in Alberta.

If you are preparing for your Mortgage Brokerage Exam in Alberta and wish to become a Licensed Mortgage Broker in Alberta, one of the biggest questions you must be pondering on would be – What to expect in the Mortgage Brokerage Exam in Alberta? So, we have something for you!

We are here to tell you everything you need to know before appearing for the Exam – from the Types of Questions and Number of Questions you can expect to Updated Exam Weightings for the Mortgage Brokerage Exam as well as Time Management Tips to Pass the Mortgage Brokerage Exam in the first attempt. With the help of our advice and suggestions, you can give your best shot!

INFORMATION ON THE MORTGAGE BROKERAGE EXAM IN ALBERTA

1. Exam Format

The format of the Mortgage Brokerage Exam is completely Digital – Computer-based. It is taken entirely on a Computer and there is no need for any hand-written content to complete the exam. Please note that it is NOT an Online Exam as some COVID-related rules have been lifted. Although, it was conducted online for a while when the restrictions were in place. But as of Sept 2021, the Exam has to be taken at the RECA-Approved Exam Centres nominated for each of the applicant. When you apply for the exam through your RECA portal, you can see the exam centre that is nominated to you by RECA and visit the centre on your exam day to attempt the exam.

2. Total Number of Questions

The total number of questions that you can expect in the Mortgage Brokerage Exam in Alberta would be 100.

3. Question Format

All the questions that you will get in the exam will be MCQs or Multiple-Choice Questions.

4. Exam Duration

The total duration of the exam is 3 Hours.

5. Passing Criteria

In order to pass the exam, you have to score a minimum of 70% i.e., 70 correct answers out of a total of 100 Questions in the exam. In other words, the passing marks for the exam is 70 marks.

6. Results

The beauty of this exam format is it gives you Instant Results once you are done with all the questions. As soon as you complete all the questions, you get the result of Pass or Fail right away on your Computer Screen. This way you don’t have to wait worrying about them for a long time. In addition to this, for your benefit, the results give a summary of your overall performance in the exam based on individual units of each of the courses. Although, it will not specify your performance on particular questions, but it will give you a synopsis of your performance unit-wise.

7. Total Number of Attempts

There are a total of 2 Attempts given in order to clear the Mortgage Brokerage Exam. If you fail to clear the exam in the first attempt, you have a second attempt available. Again, a plus point is that you can give the 2nd attempt as soon as 24 hours after completing your exam. This gives you the flexibility to appear for the exam sooner when you are still in that exam preparation mode. 

Note:
If you fail in both the attempts and are not able to clear your exam, you will have to re-apply for your Courses with RECA by paying the fees again and then repeat the whole process again. It is thus, better to prepare for the Mortgage Brokerage Exam properly to ensure you don't have to take this route and pay double RECA Fees.

Now, its good to know all the information about appearing for the Exam, but the question remains – How to Pass the Mortgage Brokerage Exam in Alberta? What is the strategy??

Well, let’s look in to it.

STRATEGY TO PASS THE MORTGAGE BROKERAGE EXAM IN THE FIRST ATTEMPT

1. Education Requirements

In order to become a Licensed Mortgage Broker in Alberta, you will have to enroll in the Mortgage Associates Program (MAP) issued by the Mortgage Licensing body of Alberta – Alberta Mortgage Brokers Association (AMBA).

The MAP consists of 2 Courses – Fundamentals of Mortgage Brokerage Course & the Practice of Mortgage Brokerage Course. MAP costs $2,800 and you must complete the program within 1 year.

2. Types of Questions you can expect on the exam

A. Definition Questions

These questions will relate to any kind of term that they can ask you to define. So, they can either give you a term to define and they will ask you for the definition of that term or they can give you a definition and they will ask you what term that describes. For example, concepts like Mortgage Broker, Amortization Period, Closing Costs, Closed Mortgage, CMHC, etc. These are all the terms that we need to understand as Mortgage Brokers, and they can ask you to describe these terms on the exam or they can ask you what this sentence describes. Definition Questions are very common and one should definitely be prepared for these type of questions.

B. Scenario Questions

One of the most difficult types of questions to expect in the Alberta Mortgage Brokerage Exam would be scenario or situational questions. Scenario questions basically ask you who, what, when, where or why of any situation. So, they will give you a scenario and based on that, you will have to answer the given question. These types of questions are best answered by understanding the concepts. So here, we are not trying to memorize a term, but we must go deeper and really understand the concept so that we can answer these types of questions.

C. Math/Calculation Questions

There will be some Math-related Questions in the Exam. The first course (Fundamentals) will not have a lot of math questions whereas, the second course (Practice) has comparably more calculative topics than the first course.

3. Exam Weightings

The Course content for the Mortgage Brokerage is divided based on Units. Unit-wise distribution is important and helpful as it categorizes the content based on various sub-topics and gives a clear idea of each of the topics in detail. It is also important from the exam perspective because AMBA prepares questions based on essential sub-topics i.e., Units. Thus, there are some units that are more important from an exam preparation view.

For instance, in the Fundamentals of Mortgage Brokerage Course, the following table shows the exam weightings for each of the units along with the number of questions that can be expected from each of them. Have a look –

4. Time Management Tips for the Exam

Now, there are 3 hours to complete the exam and a total of 100 questions. This means that you can spend less than 2 minutes per question on an average, in order to attempt all the questions and complete the exam on time. We recommend to defer the questions that you may feel difficult and keep them for the end to prioritize easy questions. This will help you save time and give you more time to think for questions that are difficult and time-consuming.

Alberta Real Estate School is here to help you guide in the smallest of doubts and the biggest of questions that you can ask for. Get to know –

How to qualify for a Mortgage Brokerage License Application in Alberta?

Join Alberta Real Estate School for expert help with understanding the concepts of Real Estate and getting uncommon and detailed tutoring sessions summarized as per your needs. Get our personalized Notes designed to get you through the Real Estate Exams in the first attempt! Visit our list of Real Estate Tutoring Sessions for details.

If you have any doubts for Exam Preparation of any of the real estate courses or topics, reach out to us directly at 587.936.7779.

Happy Studying!

You can also listen to this article in the podcast above. We hope you found this information useful. Stick to us for more updates.

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