As a borrower, you are judged on a few things:

  1. Debt service ratios – how your total monthly debt payments compare to your gross monthly income
  2. Credit

The mortgage rule changes in the last couple of years have made it tougher and tougher for those borrowers who push the limits of qualification. 

By the end of 2013, these calculations are going to be even more restrictive.

At the end of June, CMHC issued new “guidelines” for calculating debt service ratios and confirming income documents.

Under the current guidelines, there are general formulas but no indication on how each input it to be treated, the new guidelines get specific about the inputs.

Insured and uninsured will likely be treated the same as well, for most lenders, to simplify their backend systems and underwriting process – so even if you have 25% equity/down payment in a property, you will be beholden to the same restrictive guidelines.

To give you an idea of the changes, here are some of the CMHC “clarifications” from CanadianMortgageTrends.com:

  1. For variable income: Lenders must use “an amount not exceeding the average income of the past two years.” Variable refers to things like bonuses, tips, seasonal employment and investment income.
  2. For rental income:  If a borrower owns other non-owner occupied rental properties, the principal, interest, property taxes and heat (P.I.T.H.) on those properties must either be:For guarantor income:  A guarantor’s income must not be used in GDS/TDS ratios “unless the guarantor…occupies the home and is the spouse or common-law partner of the borrower.”Unsecured credit lines & credit cards: For these debts, “No less than 3% of the outstanding balance” must be included in monthly debt payments. Interest-only payments are no longer considered on credit lines. Furthermore, lenders must assess the borrower’s credit history and borrowing behaviour when determining the amount of revolving credit that should be accounted for in debt ratios.
    • deducted from gross rent revenue to establish net rental income;
    • or included in ‘other debt obligations’ when the Total Debt Service (TDS) ratio is being calculated.
  3. Secured lines of credit:  Lenders must factor in “the equivalent” of a payment that’s based on “the outstanding balance amortized over 25 years.” That payment must use the contract rate (of the LOC) or the 5-year Benchmark rate (V121764) published by Bank of Canada (if the contract rate is unknown). Again, interest-only payments are no longer allowed for debt ratio calculation purposes.
  4. Heating costs:  Lenders must now obtain the “actual heating cost records” of a property. When no such history is available, the heat expense used in debt ratio calculations “must be a reasonable estimate taking into consideration factors such as property size, location and/or type of heating system.” That’s why some lenders have now moved to a set heating cost formula, like:  (square footage x $0.75) / 12 months.  Compared to past methods (which entailed flat heating costs, like $100/month), the new guidelines can double or triple the heating cost that must be factored into debt ratios on larger properties, and reduce it on smaller ones.

Most lenders starting implementing these policies in May and June of this year but there are still lenders in the midst of the changes and those that are willing to make exceptions, for now.

The most restrictive and, so far, the rules having the largest impact on borrowers’ ability to qualify is numbers 4 and 5 above.  Those with large balances on personal lines of credit, instead of being able to use the interest only payment amount, we now have to use 3% of the balance which, for a $50,000 balance, takes the monthly amount from about $187 to $1,500 – a massive impact!

If you’re unsure of how these rules changes will affect your ability to qualify, don’t hesitate to contact me.  Typical mortgage/loan calculators won’t take these changes, or your current debt load, into consideration.