All the Numbers

Would a lender write the mortgage?

From the All the Numbers wiki · Housing

Before lending, a lender checks that the household could carry the payments even if rates were higher. All the Numbers runs the same published screen and reports whether the home passes. It is a screen, not an approval: a pass does not mean a lender will say yes.

The rules

  • Stress-test rate. The payment is worked out at the greater of the contract rate plus 2 percentage points[1] or 5.25%.[2][3] It applies to insured and uninsured mortgages alike.
  • GDS (gross debt service): the mortgage payment, property tax, heat and half of any condominium fee,[4] as a share of gross income. The insured limit is 39%.[5]
  • TDS (total debt service): everything in GDS plus other debt payments, such as loans and credit-card minimums. The insured limit is 44%.[6]
  • Heat is counted at $125 a month.[7] CMHC asks for an actual figure or a reasonable estimate; $125 is a lender convention, not a rule.
  • Rent from a suite. For an owner-occupied two-unit home, CMHC will count up to 100% of the suite's gross rent as income.[8] Conventional lenders often count 50% to 80%, and the engine's lower policy adds 50% of gross rent.[9] All the Numbers uses the 100% figure for its two-unit home. How the CRA treats the same rent as income is a separate matter.
  • The mortgage payment is worked out on the loan including any insurance premium, over the amortization requested, using the semi-annual compounding convention.

What the engine does

  • Computes the stress-test payment, then both ratios, and passes the home only if each is at or under its limit.
  • Counts gross income for both people in a couple in the year of purchase, as the plan projects it (pay and pensions, so a retirement before the purchase counts), plus 100% of suite rent when a suite is planned.
  • Counts monthly debt payments from the debts entered, and property tax from the home's property tax rate.
  • Does not re-test qualification after the purchase. A lender tests once, when it writes the loan; it does not ask again if income later falls, and neither does the plan. A plan that later runs short of cash is handled by borrowing, not by this test.
  • When a lender would refuse a home, the plan leaves it out, and every home bought after it, and goes on with you renting. It says which ratio failed and marks the inputs to change, and on request finds the first later year, the salary today or the down payment at which the home would pass.

What it deliberately does not

  • Credit score, down-payment source checks and each lender's own overlays. A pass is a published-rules screen, not a lender approval.
  • Lenders that apply different ratio limits to uninsured mortgages. The limits used are the insured ones.
  • The federal secondary-suite loan program, which was announced and then cancelled before it opened.

See also

  • Buying a cottage · A cottage is a second home for you and your family, kept alongside the home you live in. It can be bought with as little as 5% down if it is usable all year, or 10% if it is seasonal, but first-time buyer help, the Home Buyers' Plan and the FHSA cannot pay for it.
  • Car loans, student loans, lines of credit and credit cards · Each debt you enter is a balance with a yearly rate and a monthly payment. The plan charges the interest each month and takes the payment from cash until the debt is paid off. A lender counts the payments of what is still owed when you buy a home.
  • Closing costs and the cash to close · The cash a buyer pays on closing day is the down payment, the land transfer tax after any first-time buyer refund, the taxes and fees on the purchase, and one amount for legal and inspection costs that starts at $3,000. Adjustments are not worked out unless they are added to that amount.
  • How a mortgage payment is worked out · A fixed-rate Canadian mortgage compounds its interest twice a year, not monthly, so the monthly payment comes from a rate slightly lower than the quoted rate divided by twelve. The default rate is 4.27%, and the rate stays fixed for the whole amortization.
  • Mortgage default insurance · A buyer putting down less than 20% must buy mortgage default insurance from CMHC or a competitor. The premium is 2.80%, 3.10% or 4.00% of the loan depending on the down payment, is added to the mortgage, and carries 8% Ontario sales tax paid in cash at closing.
  • Rent, and when it stops · Rent is its own line in the plan rather than part of living expenses, and it stops the month your first home closes — because a household that has bought is not paying both. Give it an end date if you would keep renting past that.
  • Renting out a suite · Rent from part of your home is taxable income. The costs of the whole home are deductible only for the rented share, mortgage principal and land transfer tax are not deductible, and a loss offsets other income when the rental is run to earn money. A lender may count part of the rent when you apply.
  • The Home Buyers' Plan · Up to $60,000 out of an RRSP, untaxed, for a first home — but it is a loan to yourself, repaid over fifteen years, and a missed repayment is taxed as income that year.
  • When the plan runs short of cash · When a month needs more money than the plan has, it draws savings in a set order, then borrows on a home equity line at 5.13% and an unsecured line at 8.38%, as far as a lender would lend. When no lender would lend more, the projection stops.

References

  1. ↑CMHC — Calculating GDS/TDS · Minimum qualifying rate spread over the contract rate: 2 percentage points (the floor rate is its own rule) · 2% · effective 2021-06-01
  2. ↑OSFI — Minimum qualifying rate for uninsured mortgages · Qualifying rate floor · 5.25% · effective 2021-06-01
  3. ↑OSFI — Minimum qualifying rate for uninsured mortgages · Minimum qualifying rate · effective 2021-06-01
  4. ↑CMHC — Calculating GDS/TDS · Share of condominium fees included in GDS/TDS shelter costs (insured) · 50% · effective 2021-06-01
  5. ↑CMHC — Calculating GDS / TDS ("CMHC restricts debt service ratios to 39% (GDS) and 44% (TDS)") · GDS maximum (insured) · 39% · effective 2021-07-05
  6. ↑CMHC — Calculating GDS / TDS ("CMHC restricts debt service ratios to 39% (GDS) and 44% (TDS)") · TDS maximum (insured) · 44% · effective 2021-07-05
  7. ↑CMHC — Calculating GDS / TDS (actual heat costs, else "a reasonable estimate") · Heating estimate for GDS (lender convention) · $125 · effective 2026-01-01
  8. ↑CMHC — Calculating GDS / TDS ("up to 100% of gross rental income from the secondary suite") · Suite gross-rent add-back, 2-unit owner-occupied (insured) · 100% · effective 2023-01-01
  9. ↑CMHC — Rental income · Rental income policy for qualification: the share of gross rent added to income (an underwriting convention; the owner-occupied 2-unit variant is its own rule) · 50% · effective 2021-06-01