So you want to buy a new car. Maybe you’re excited to ditch public transportation and get your own set of wheels. Maybe you landed an amazing new job and want to treat yourself to an upgrade because your current odometer reading is over 400k. I hate to rain on your parade, but you may want to avoid financing or leasing a car if you’re also thinking about purchasing a property in the next few years.
When it comes to your mortgage application one of the most important things to prove in 2018 and going forward is your ability to “service” or pay for your debt. Of course your credit score and size of down payment will also influence your approval, but not as much as your debt service level. Total Debt Service (TDS) and Gross Debt Service (GDS) are ratios calculated on every application, and must be below a certain percentage for an application to be approved. Current regulations states that with good credit you’re allowed a TDS of up to 44%. In other words, 44 cents from every dollar you earn (before taxes) can go towards paying or “serving” your debt.
The latest “Stress Tests” that came into effect on January 1st, 2018 is another way that the regulators want you to further prove that you would be able to make your payments. The Bank of Canada benchmark rate (or contract rate) plus 2% is used in your mortgage application calculations, even though the rate you would actually pay may be much lower. The end result is a higher TDS ratio which either requires more income to service it, or a lower mortgage amount in order to get an approval.
Now back to that fancy SUV you were eyeing out. Did you know that a $475 monthly car lease or finance payment will cost you approximately $100,000 in mortgage buying power? That could be the difference between a house you will like and a house you will love. It could also be the difference between getting approved and not getting approved. This is because your car payment, along with all your other debts, are calculated into your TDS. As you can see, any amount of liabilities will make your application a little tougher to fund.
Thinking about buying a house? Also need a car? Pay cash, use public transit, or share a car until you move into your house, and then finance a new car.
If you have any questions about this blog post or any other mortgage issues, feel free to reach out.
Antonio Del Pellaro