Understanding Property Lending in Canada

Before you fall in love with property listings or sign up for open houses, there's one thing you need to understand first: how property lending works.

This means taking out a mortgage.

Lenders won't give you that just because. They'll assess your income, debts, credit score, and how you'd fare if interest rates rise unexpectedly.

It's not always straightforward, and even financially stable buyers can get tripped up by stress tests or debt ratio rules.

This guide walks you through what you need to know so you can approach this process as prepared as possible.

What Is a Property Loan?

“Property loan” is typically synonymous to mortgage, which is a loan you take out to help finance the purchase of a home.

This loan lets you pay a portion of the home's cost upfront, known as a down payment, while borrowing the rest from a lender, which can be a bank or credit union.

Mortgages come with terms that define how long you'll repay the loan (amortization period) and at what interest rate.

These rates can be fixed, which means they stay the same throughout the term, or variable, which means they fluctuate based on market conditions.

Canadian Mortgage Requirements

Before approving your mortgage, lenders take a close look at your finances.

They check if your finances are stable, consistent, and capable of handling the long-term commitment of home-ownership.

Particularly, they look at:

• Income: Your gross (pre-tax) income is used to determine how much mortgage you can realistically afford. Steady employment and documented earnings help build your credibility as a borrower.
• Debts: Existing debts, like credit cards, student loans, car payments, or lines of credit, are factored into your debt load.
• Credit Score and Report: Your credit history tells lenders how reliably you've repaid money in the past. A strong score increases your chance of approval and possibly better rates.
• Monthly Expenses: Lenders want to know how much of your income is already committed to utilities, groceries, insurance, and other fixed costs.
• Loan Amount: The amount you're borrowing matters, as higher loan requests means stricter requirements.
• Amortization Period: This is the total time you'll take to pay off your mortgage, which is typically 25 years. A longer period reduces monthly payments but increases overall interest costs.

Lenders use two main ratios to determine affordability:

• Gross Debt Service (GDS) Ratio: Ideally no more than 39% of your gross monthly income should go toward housing costs. This includes:
  
  • Mortgage payments
  • Property taxes
  • Heating costs
  • 50% of condo fees (if applicable)
• Total Debt Service (TDS) Ratio: Should be no more than 44% of your gross income. This includes everything in the GDS plus all other debts.

For example, let's say your gross household income is $6,000 a month.

Under the GDS rule, your monthly housing costs shouldn't exceed $2,340.

Under the TDS rule, your total monthly debt obligations shouldn't exceed $2,640.

Even if you qualify with higher ratios, it increases your risk of financial strain, especially if rates go up.

Your end goal should be to qualify comfortably.

Credit Score and Property Lending

Lenders review your full credit report to assess your history of borrowing and repayment.

This lets them evaluate how reliably you've managed debt in the past and how risky it might be to lend to you.

There's no official minimum credit score required to get a mortgage, but that doesn't mean it's not important.

A strong score can improve your chances of approval and may even help you secure a better interest rate.

A poor credit score could result in your application being denied, or may mean you'll need a cosigner to move forward.

In Canada, credit scores range from 300 to 900, and are interpreted as follows:

• 300-559 is poor, and qualifying for a mortgage with this score is extremely difficult.
• 560-659 is fair, but you may face higher interest rates or stricter conditions.
• 660-724 is  good, and should be enough to qualify for a mortgage with decent terms.
• 725-759 is very good, increasing your chances of better rates and lender flexibility.
• 760-900 is excellent, offering the best chances for approval and the most competitive interest rates.

Income and Affordability

There's no minimum fixed income required. Lenders don't look for a specific dollar amount.

Instead, they evaluate how your income stacks against your financial obligations, especially in relation to the mentioned GDS and TDS ratios.

The higher your income relative to your debts, the more likely you'll qualify for a mortgage, and potentially for a larger loan amount or better interest rate.

What matters most is how well your income can cover both your housing costs and your existing debt without stretching your finances too thin.

Lending Rates and the Stress Test

One of the first decisions you'll make when choosing a mortgage is whether to go with a fixed or variable interest rate.

A fixed rate stays the same throughout the term of your mortgage, giving you predictable monthly payments.

A variable rate can fluctuate with the market, meaning your payments may increase or decrease depending on changes to your lender's prime rate.

Regardless of which you choose, you'll need to pass the mortgage stress test. This is a federal requirement that applies to both insured and uninsured mortgages.

This test is made to make sure you could still afford your mortgage if interest rates were to rise.

To pass, you must qualify at a higher rate than what's in your mortgage contract.

Specifically, you need to be able to handle payments at either 5.25% or your negotiated mortgage rate + 2%, whichever is higher.

If your actual mortgage rate is 4.8%, you'd have to qualify at 6.8%.

Tips Before Applying for a Mortgage

• Review your credit report for errors and take steps to improve your credit score. A better score can boost your chances of approval and help you qualify for lower interest rates.
• Take advantage of online mortgage calculators and affordability checkers to estimate how much you can borrow and what your payments might be.
• Be prepared by budgeting for closing fees, property taxes, insurance, and maintenance expenses.
• Get pre-approved to help you understand your borrowing range and turn yourself into a more attractive buyer to sellers.

Take time to assess your financial readiness, from your income and debts to your credit health and budget.

The more informed and realistic you are about your borrowing capacity, the smoother your home-buying journey will be.

If you're unsure where to start or want advice tailored to your situation, consider speaking with a mortgage broker or financial advisor.

Their expertise can help you navigate the process.