A recent article by Centum Financial reported that as of January 1, 2015 qualifying for a mortgage will require the application of stricter rules for borrowers with unsecured debt.
To learn more about this, we asked Betty Talbot; mortgage broker with Centum Omni Mortgage Corp. Betty explained that, in actuality, a number of lenders were already utilizing the 3% rule on the balance of unsecured debt. In the New Year, however, all lenders will be required to comply and this can have a significant impact on the amount of mortgage a borrower can qualify for.
On July 3, 2013, in an article entitled Stricter Debt Ratio Standards on the Way, mortgage trends.com reported the following among a number of CMHC explanations for obtaining mortgage insurance:
“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.”
So what does this mean?
In the past, when calculating debt ratio for a mortgage, most lenders qualified a borrower on the lowest interest-only monthly payment required for unsecured credit lines and credit cards. Under the stricter ruling, 3% of the balance owing must be applied to any unsecured credit, contractual obligations on the line of credit notwithstanding.
The example used by Centum Financial
We’ve borrowed from the Centum article to drive home how this 3% rule can affect mortgage affordability.
Let’s say you have a $25,000 line of credit at 6% and the minimum interest-only required payment is about $125 per month. That’s the amount that a lender used to determine the mortgage amount you qualified for. With the 3% rule the monthly amount of the balance on the line of credit is $750 ($25,000 x 3%). That negatively impacts your qualifying ratio by $625 ($735-$125).
How does it affect the mortgage you can borrow?
Let’s say you make $65,000 per year in salary or wages. Under the minimum requirement calculation of $125, you would qualify for a mortgage of about $325,000. Using the 3% rule, by adding the $750 to your liabilities, you “...would go from qualifying for a mortgage of approx. $325,000 to $200,000.” That’s a mortgage that’s $125,000 smaller and a huge difference in the quality of home you are able to buy and the amenities it can offer.
There are changes also to secured lines of credit.
Again, interest only payments are no longer allowed for secured lines of credit when calculating debt ratio for a mortgage. According to Mortgagetrends.com, “Lenders must use ‘the equivalent’ of a payment that’s based on ‘the outstanding balance amortized over 25 years.’” The interest rate applied must be the rate contracted on the line of credit and if unknown, the 5-year Benchmark rate published by the Bank of Canada. All Lenders will now be playing by the same rules.