Dream of owning a home, or a different home? Your debt is a big part of the (mortgage) picture that you need to consider. Here's how lenders see your debt when you want to buy a home or property in Canada.
Do you have debt? You're not alone. Credit card balances in Canada rose 14.5% since last year (according to Equifax Quarterly Report, June 6, 2023). And the rest of 2023 isn't looking to let up amid our higher cost of living and immigration influx.
The thing is, having a good credit history can actually help you secure a mortgage loan. And managing your debt well can help you qualify for a higher home-price amount or a lower interest rate.
But certain types of debt can weigh heavier on your mortgage pre-approval. While lenders like to see a diverse credit history, not all your debt is viewed the same way. Some debt-types also have the potential to carry increasingly-higher balances, which can make it more important (or harder) for you to keep your debt in check.
Lenders will treat a debt-type in one of two ways: they'll either take the entire balance (which they calculate into 'monthly' payments at their own percentages), or they'll take the actual monthly payment hit on your cash flow. Plus, for your bottom line, some types are easier to budget and pay down than others — helping to keep your debt service ratios down and credit score up.
Canada Revenue Agency (CRA). Entire balance, paid off asap. This type of debt is an instant no-go. If you owe back taxes or are in arrears, you'll be asked to clear this debt before a lender will consider your pre-approval.
Revolving, Unsecured. Entire balance. For this type of debt, a lender typically looks at the entire balance to calculate an amount you should be paying every month to clear it off, regardless of how much you actually pay down per month. The higher the balance, the quicker it adds up in lender calculations, and the more it works against your mortgage-borrowing potential.
Secured. Monthly-payment amount. A mortgage is a type of instalment debt, but usually much larger and therefore paid back over several more years (25 years is standard). Lenders will use your potential monthly payment based on your affordability numbers or your actual payment if you already have a mortgage.
Secured. Monthly-payment amount. A vehicle loan is an example of this debt-type. The fixed payments (typically set for 1 - 8 years) can be easier to budget around than revolving credit (where monthly repayment can climb in a short period of time). Lenders will calculate your debt-service ratios using your fixed payment amounts rather than factoring in the entire loan balance.
Revolving, Secured. Entire balance. Different than a Line of Credit (LOC), which is unsecured and usually carries a higher interest rate — many people use a Home Equity Line of Credit (HELOC) to consolidate higher-interest debt, or for larger expenses, such as home renovations. This type of debt is calculated out like a mortgage, rather than a percentage of the balance.
Entire balance. If you have pending or active student payments, lenders calculate a portion of the entire balance into your monthly debt load. For the most part, student loans carry lower interest and more flexible payback schedules and are less 'weighted' compared to, say, credit card debt.
Monthly-payment amount. Lenders factor these payments into your debt service ratio if you're paying out. If you're receiving these payments, a portion is added to your monthly income.
Ultimately, how you manage your debt is reflected in your credit score, and directly affects your overall monthly debt service (debt-to-income) ratios, both of which lenders use to qualify you.
No matter what debt you have, being realistic with your income and budget will help you keep up consistent payments for a healthier credit picture. And the longer you can show a good history of paying your debt, the easier it will be to get your preferred lender, or an even better rate, on board.
Looking to buy a home? Our amazing True North Mortgage brokers can help you with all your debt questions — in your preferred language — and can quickly process your pre-approval so that you know exactly where you stand and which lender is your best fit.
Curious about your credit report? You can check it out for free with Equifax Canada
Know before you go (house hunting, that is). Get pre-approved fast, hold your best rate.
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