Dealing with debt is a common reality for many Canadians. In fact, according to the Equifax Quarterly Report as of June 6, 2023, credit card balances in Canada have surged by 14.5% compared to the previous year. And as the year unfolds, it's clear that the higher cost of living and increased immigration are contributing to this trend.
It's worth noting that when it comes to securing a mortgage loan, not all debts are treated equally in the eyes of lenders. Your credit history plays a pivotal role in mortgage approval, and your ability to manage debt can determine whether you qualify for a higher loan amount or a lower interest rate.
However, different types of debt can have varying impacts on your mortgage pre-approval. Lenders appreciate a diverse credit history, but they also consider the nature of your debts. Some types of debt can accumulate rapidly, making it challenging to keep your financial obligations in check.
Here's how various kinds of debt can influence your mortgage pre-approval:
Federal Debt: If you owe back taxes or are in arrears with the Canada Revenue Agency (CRA), addressing this debt is a top priority. Lenders typically require you to clear this debt before considering your pre-approval.
Credit Card and Line of Credit Debt: These revolving, unsecured debts are evaluated based on the entire balance. Lenders calculate a monthly payment amount regardless of how much you pay down each month. Higher balances can quickly impact your mortgage eligibility.
It's important to make regular payments on these debts, especially if you carry balances from month to month.
Paying only the minimum amount can negatively affect your credit score.
Consistency in managing these debts may be considered by lenders.
Mortgage Debt: As a secured form of debt, lenders assess your ability to make the monthly mortgage payment. While mortgages represent a substantial financial commitment, they are typically spread over a more extended period, which can be less burdensome than high balances on other debts.
Having more than one mortgage is possible if you meet income and equity requirements.
Instalment Debt: This secured debt, like a vehicle loan, involves fixed monthly payments, making budgeting easier. Lenders calculate your debt-service ratios based on these fixed payment amounts rather than the entire loan balance.
Home Equity Line of Credit (HELOC) Debt: HELOCs are secured and treated similarly to mortgages in terms of calculations. They offer flexibility but can impact your debt service ratios, as they are revolving and subject to changes in balance.
Student Loans: Lenders consider a portion of the entire balance when evaluating your monthly debt load. Student loans typically have more flexible repayment options and lower interest rates compared to other debts.
Spousal or Child Support Payments: These payments are factored into your debt service ratio if you're making them. If you're receiving such payments, they can be added to your monthly income.
Remember, how you manage your debt reflects in your credit score and affects your monthly debt service ratios, which lenders use to determine your eligibility.
Understanding how lenders evaluate your debt can be complex, but our dedicated brokers are here to simplify the process. They can address all your debt-related questions and swiftly guide you through the pre-approval process, helping you find the right lender for your needs.
Curious about your credit report? Equifax Canada offers a free credit report check. Take control of your financial future and embark on your homeownership journey with confidence.
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