All Canadian lending institutions follow national lending rules, but where they differ is with their own internal lending policies. Often times, borrowers are denied a mortgage or take out a smaller mortgage than what they can otherwise afford purely because of policy… which can be different from one bank to another. As a mortgage associate, as much as we’re able to shop around to give you the best rates, we truly add value in understanding lending policies at different institutions. Here, the main lender policy differences that we consider when a broker is looking for the right institution for you:
1) Mortgage Insurers: There are three insurers for high ratio mortgages in Canada; CMHC, Genworth, and CG. There are a few mortgage lenders the use all three whey you’re applying with them, but most mortgage lenders only use either one or two. Depending on which insurer(s) a lender uses, they may see your application in a different light. For this reason, we see instances where an individual might be approved by one insurer, but previously declined by another.
2) Debt Servicing Ratios: Typically, the banks like to see that 32% of your gross income will cover your principal, interest, taxes, and heat. But some trust companies look for a ratio of up to 35%. Sometimes borrowers can afford more than they are able show on paper, as is often the case with self-employed individuals. This can mean the difference in getting the property they want and having to go with one the banks think they can afford.
3) Different Credit Scores: It’s most commonly thought that a 600 beacon score on your credit report is the cut-off for getting AAA mortgage rates. In fact, some lenders go as low as 590, while others have moved their credit cut-offs to 620 or 650. So applying with one lender and having a 617 beacon score would lead to a decline. More often than not people think the decline by one lender means they won’t be approved anywhere. Not true.
4) Rental Calculations: Make sure to ask your mortgage lender how they compute rental income if you have existing properties, keeping the one you’re in as a rental, or purchasing a rental. Most major lenders use a 50% income inclusion. This means that very little of your rent gets applied against the cost of the property, leading to a lower borrowing ability. Some lenders use high rental offset or spreadsheet calculations which can favor the amount of rents used to offset the debt and have minimal impact on your ability to purchase. Too often we see clients sell their existing property because they’re advised they can’t keep it and buy a new principal residence at the same time. This is bad financial advice as it may be in the client’s best interest to keep the property from a long term investment strategy and they may have been able to do so if they worked with a mortgage lender that considered more rental income into the approval process.
5) Lending Limits/locations: When buying in remote locations or high end properties, it’s important to understand how lenders view this. Some won’t discount the rate as much, others may scale back on the amount they lend, and others may simply not do it. Shop around to make sure you’re finding the best offer.