Stricter Debt Ratio Standards on the Way
If you’re a typical borrower, your debt ratios will largely determine if you’re approved for a mortgage.
- 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.
- 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:
- 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.
- 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.
- 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 the5-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.
- 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