Humber/Ontario Real Estate Course 3 Exam Practice

What is a significant difference between the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios?

1. The TDS ratio is typically lower than the GDS ratio

2. The GDS ratio includes personal debts

3. The TDS ratio excludes credit card debt

4. The TDS ratio includes personal debts

5. The GDS ratio is always higher

6. The TDS ratio does not consider mortgage payments

The correct answer is: The TDS ratio includes personal debts

The reason why the answer is significant lies in the fundamental definitions and calculations of the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios. The GDS ratio is primarily concerned with housing-related expenses, measuring the portion of a borrower's gross income that goes toward housing costs such as mortgage payments, property taxes, and heating expenses. In contrast, the TDS ratio accounts for a wider scope of debt obligations, including housing costs as well as other unsecured personal debts such as credit card payments, car loans, and any other liabilities. By including these additional personal debts, the TDS ratio provides a more comprehensive view of a borrower’s overall debt service obligations in relation to their income. This divergence is significant because it allows lenders to gauge a borrower’s ability to manage all debts rather than just housing-related payments. Thus, when comparing the two ratios, the inclusion of personal debts in the TDS is what differentiates it from the GDS. Other statements address different aspects of these ratios but do not accurately reflect their definitions or the implications of their calculations. Understanding this distinction is crucial for both lenders assessing risk and borrowers managing their financial obligations.