How Mortgage Approvals Work In Canada

How Mortgage Approvals Work In Canada

There are so many variations of mortgage approvals, so there’s no hard and fast rule. Besides varying lending thresholds, there are different ways of looking at income, debt, assets, ownership, and source of funds. We’ve done many investment properties deals so we’ve seen our fair share of investment property mortgage approvals in Canada. Here are our best insights on what banks look at when they approve investment property mortgages.

1. Borrowing Against Your Income

The most common approval method is to offer a mortgage based on your income. First, they check whether you can afford to pay for the new debt and expenses with your total income using a metric called the GDS ratio. Typically, GDS needs to be lower than 32% but this can vary by bank.

Banks further test your financial situation by checking to see if you can pay for all of your debt and expenses with your total income using a metric called the TDS ratio. Typically, TDS needs to be lower than 40% but this can also vary by bank.

Gross Debt Service (GDS)

= (New Debt Payments + Expenses) / Total Income

Total Debt Service (TDS)

= (New & Existing Debt Payments + Expenses) / Total Income

Variations On Income

Banks calculate income differently. Depending on your income sources, you may be able to qualify for higher income at certain banks. Here are the main income sources banks consider when approving mortgages:

  • 100% Salary (3 months track record or your past 2 years of income on your T1)
  • 100% Commission, Interest or Dividends From Non-Registered Accounts (2 years track record)
  • 0 - 70% Registered Accounts Interest or & Dividends
  • 0-100% of Rental Income (the better of actual rents or appraised rents)
  • 100% - 120% Self Employed Income (2 years track record)

Variations On Debt

Banks also calculate rental property debt differently. Typically, a property’s debt payments include the monthly mortgage, heating expenses, property taxes, insurance, and condo fees. However, some banks do not include heating, property tax, and condo fees in GDS & TDS ratios which improves your borrowing power.

Debt Coverage Ratio (DCR)

= New Operating Income / New Debt Payments

Some banks check to see if your new investment property can sustain itself before lending you the new mortgage, and require the DCR to be at least 1.2. So if you’re thinking about buying lower cash flowing properties that have a potential for higher appreciation, banks that use DCR might not work for you.

On the other hand, banks that usually look at DCR may also put your existing investment properties as a separate portfolio if they can sustain themselves. This means they won’t include existing investment property debt in the TDS calculations which actually improves your borrowing power and ability to scale.

2. Borrowing Against Your Liquid Assets

Maximum Mortgage Amount

= Total Value Of Liquid Assets

If you are a high net worth individual with over $250,000 in liquid assets, some banks may offer you a mortgage based on a 1:1 ratio depending on how much liquid assets you have. This program may be combined with your income to increase your mortgage amount.

3. Other Considerations

There are many other variations, so there can be other things banks look at before approving a mortgage. Other things that can affect your mortgage approval include your total assets, ownership structure, and source of funds.

Your Assets

Your mortgage approval may be limited by what you already own. For example, some banks will only lend to you if you have less than 4 properties with their bank, others may lend to you up 6 properties. Some banks are even more conservative and will only lend to you if you have less than 4 properties with any bank, while others may allow for up to 16 properties in total at all banks.

Your mortgage approval may depend on the price property you’re looking to buy. Without special exceptions, some banks can only lend you when properties are valued at under $1.2M, while others have a higher cap at $2.5M.

Finally, the type of property matters. The mortgage rate of rental properties may be higher (15bps+) compared to primary residences. Commercial properties tend to have higher interest rates and require a larger downpayment of 35%. Short term rentals, rooming houses, or time-sharing properties may not be allowed with some lenders.

Ownership

The ownership structure may affect your mortgage. Some banks give preference to certain professionals, such as doctors, and will offer lower rates. On the other hand, if you are buying a property as a corporation or if you are a Canadian non-resident, only certain banks will allow this and you may require a larger downpayment and higher rates.

Source Of Funds

To make the best use of money, some banks allow you to use money from refinancing as a downpayment for new properties. As lending has tightened recently, stricter banks will require to see a proof of funds for 60-90 days and may not allow the use of refinanced funds for a new property’s downpayment.

Need Help With Real Estate Investing In Toronto?

If you haven’t checked with banks yet, don’t assume that you don’t qualify for another mortgage because you’ve maxed out on your primary residence. Rental properties are different and it’s possible that you can still qualify! 

We’re happy to schedule a free discovery call to help you buy an investment property in Toronto. In the call, we’ll learn more about your so we direct you to the best banks or brokers based on your unique situation and needs.