How Debt Affects Your Mortgage Application in Canada

Does having a loan affect mortgage renewal? Understand the nuances of good versus bad debt. Discover how strategic debt management can strengthen your mortgage application.

How Debt Impacts Your Mortgage Application: Understanding Good vs. Bad Debt

Are you dreaming of owning a home or upgrading to a new one? Your debt plays a significant role in the mortgage approval process. Understanding how different types of debt affect your eligibility can empower you to make informed financial decisions and improve your chances of securing your desired mortgage.

Lenders want multiple credit devices and a 2-year history of managing debt to demonstrate responsibility and budgeting skills. Proving your ability to manage debt will go a long way toward qualifying for a mortgage. The magic minimum credit score you are shooting for is 680. While there are mortgage options for all levels of credit ratings, a higher score opens many more doors for you!

Not All Debt is Created Equal:

Debt is a standard part of life for many Canadians, but lenders do not view all debts equally.

Does having a loan affect mortgage renewal?

While managing debt responsibly can enhance your mortgage prospects, certain types of debt can raise red flags during the application process.

The Impact of Various Types of Debt on Your Mortgage Application:

Here’s a closer look at how different forms of debt can influence your mortgage pre-approval:

Canada Revenue Agency (Tax Debt): If you owe back taxes or have outstanding CRA debts, addressing these obligations is critical before seeking mortgage approval. The Banks will not look past any outstanding debts owed to the government.

Credit Card and Line of Credit Debt: Lenders typically consider the entire balance of revolving credit accounts, such as credit cards and lines of credit, when assessing your debt load. Carrying high balances or making only minimum payments can negatively impact your borrowing capacity. With a Line of Credit (LOC), some lenders may base their calculations on the entire limit you have available, regardless of the balance you owe.

Car loans: It is common for borrowers to need help securing a mortgage due to large car loans. Did you know that for approximately every $400 in payments, this will roughly impact your mortgage qualifying [amount] by about $100,000?

Student Loans: Lenders typically include a portion of your student loan balance in your monthly debt obligations. However, student loans often offer more flexible repayment options than other debts.

Mortgage Debt: While mortgage payments are a significant financial commitment, lenders typically view them differently than other forms of debt. Your potential monthly mortgage payment is factored into your debt service ratios, but having a mortgage may not necessarily hinder your ability to borrow for another property.

Home Equity Line of Credit (HELOC) Debt: HELOCs are secured against your property and are assessed similarly to mortgages by lenders. However, since HELOCs are revolving credit accounts where you can increase a loan balance at your discretion, carrying high balances can impact your borrowing capacity.

Installment Debt: Loans with fixed monthly payments, such as auto loans, are treated differently from revolving credit accounts. When calculating your debt service ratios, lenders consider your fixed payment amounts rather than the entire loan balance.

Spousal or Child Support Payments: If you’re paying spousal or child support, these obligations are factored into your debt service ratios. Conversely, receiving support payments can increase your income and borrowing capacity.

How Mortgage Agents Determine Your Debt Service Ratios: How Debt-to-Income Ratios Affect Your Mortgage Application:

To assess your ability to manage mortgage payments and other expenses, lenders calculate two key ratios:

Gross Debt Service (GDS) Ratio: This ratio measures your housing expenses (mortgage payments, property taxes, heating costs) as a percentage of your gross annual income. Lenders typically prefer GDS ratios below 39%.

Total Debt Service (TDS) Ratio: The TDS ratio includes all your debt obligations (mortgage payments, credit card payments, loans, etc.) as well as housing expenses. Lenders generally look for TDS ratios below 44%.

How credit card debt can hurt (or help) a mortgage application

If you have a relatively small credit card balance and diligently make your minimum payments on time, that debt is unlikely to affect your mortgage application. But a history of overdue payments or a large credit card balance—especially when combined with other forms of debt—often reduces the amount you can borrow for a home purchase, and it might even disqualify you for a mortgage altogether.

Managing Debt for Mortgage  Success:

While debt can impact your mortgage application, responsible debt management will enhance your financial profile. By making timely payments, avoiding excessive debt accumulation, and maintaining a healthy credit score, you can improve your chances of mortgage approval and access better interest rates. Keeping up on minimum credit card payments or carrying a balance of less than  5% of your total credit limit can help your credit rating. The longer you can show a good history of paying your debt, the easier it will be to get a preferred rate or lender to support you!

Good Debt vs. Bad Debt!

The difference between good debt and bad debt is that good debt offers long-term financial benefits, whereas bad debt hurts your finances.

Good debt is an investment that is likely to increase in value over time or generate income. Good debt allows you to manage your finances more effectively, leverage your wealth, buy things you need, and handle unforeseen emergencies.

Examples of good debt include taking out a mortgage, buying things that save you time and money, purchasing investments and assets that generate a financial return, buying essential items, and investing in yourself by borrowing for further education or consolidating debt. Each may initially put you in a hole, but you’ll be better off in the long run for borrowing the money.

In contrast, bad debt is any debt used to finance purchases that is unlikely to increase in value or generate income. Examples of bad debt include credit card debt, car loans, and payday loans. These types of debt are often associated with high interest rates and can quickly spiral out of control, leading to financial distress.

Expert Guidance for Mortgage Success:

Navigating the complexities of debt and mortgage applications can be daunting, but you don’t have to do it alone. As an experienced mortgage professional at BRX Mortgage, I’m here to guide you through the process. I can assess your financial situation, help you restructure debt if necessary, and streamline your path to mortgage approval.

Take the Next Step Toward Homeownership:

Ready to take the next step toward homeownership? Let’s Book A Consultation to explore your options and embark on your journey to homeownership with the confidence to navigate debt and mortgage impact.

Your total debt load, including car payments, student loans, lines of credit, and credit card limits, directly affects how much mortgage you qualify for through the GDS and TDS ratios lenders use on every application.

Colin reviews the full debt picture on every file he works on, and the impact on maximum purchase price is one of the most consistent surprises he encounters with buyers who assumed their income alone would carry them. A small reduction in monthly debt obligations before you apply can meaningfully increase your borrowing capacity and put a better home within reach.

Colin Ballantyne is a Mortgage Agent Level 2

Licenced with BRX Mortgage (FSRAO Licence 13463, Licence ID M22000539), serving clients across Oakville, Burlington, Milton, Mississauga, and Ontario-wide.