‘Tis the season for sharing, family, giving, and unfortunately, overspending! If one of your 2019 goals is to buy a property, keeping debt loads in check in more important than ever. The impact of non-mortgage related consumer debt on mortgage qualifying is definitely not something anyone can afford to ignore.
Qualifying for a Mortgage Isn’t as Easy as it Used to Be
Over the last few years, the government has made significant changes to the rules for mortgages. They’ve continuously tightened qualifying parameters over the last few years, effectively bringing the significance of outstanding debt into the spotlight for aspiring homebuyers. I’ll put it to you simply: every $100 of debt payment is the equivalent of about $16,500 in mortgage financing. Sure, it may not sound like all the much, but let’s take a second to consider some numbers.
How it All Adds Up
If you have $10,000 owing on a line of credit, banks and lenders have to use a payment of 3% or $300 against your qualifying (even if your minimum payments are less). This means your top end borrowing power is reduced by about 5%. If you add a reasonable car payment of $300 in there, you are now down by almost 15% in total. With a household income of $80,000, this would mean a maximum mortgage of $320,000 compared to $365,000.
The numbers as debt levels climb, the numbers start to get pretty scary. For example, another $300 in payments (or $10,000 in debt) would take that same $80,000 income to a maximum mortgage amount of $270,000. Each additional $300 in debt payment is further reducing qualifying amounts by $50,000!
Target Debt in 2019
According to a recent report from Equifax, the average Canadian carries $22,800 in debt (excluding mortgages). Just looking at this average, maximum mortgage amounts are potentially reduced by about $135,000 for these individuals.
For first time homebuyers or those looking to move up in property value, keeping your debt loads in check should be a major priority. This holiday season, remember to think long-term. If buying property in 2019 is in the plans, make sure to keep the holiday spending down and in the black.