Lenders look at how you manage your current debt, but they do not view all debts equally. Not including mortgages, the average Canadian consumers debt clocks in at around $20,739 according to an Equifax survey completed in 2021.

When you have good credit history, it can help you secure a mortgage and qualify for a higher amount with the lowest interest rate available. Lenders like to see a few different types of credit when looking at your credit history. Lenders will look at debt in one of two ways; they’ll either take the entire balance and calculated that amount into the monthly payment or they’ll take your set monthly payments against your cash flow.

CRA debt is not acceptable under any circumstances and must be paid off immediately before being pre-approved. Revolving or unsecured debts such as credit cards are always calculated into an amount that you should be paying each month to clear it off regardless of your past monthly payments. The higher the balance, the more likely it affects your mortgage borrowing potential; so always try to stay under 75% utilization. It does not look good to creditors if you make only the minimum payment required each month.

Installment Debt

A vehicle loan is one example of instalment debt.  These fix payments are usually set for a period of 1 to 8 years but can be easier to budget compared to revolving credit where monthly payments can increase depending on your spending habits. Lenders will calculate these amounts into your monthly debt service ratio rather than the entire balance.

HELOC Debt

This is different than a line of credit which is unsecured and usually involves a high interest rate. HELOC debt is usually used to consolidate higher interest debt, larger expenses or home renovations. Lenders will usually calculate this type of debt out like a mortgage rather than a percentage of the balance. Keep in mind that this type of debt is revolving which means the balance can be increased at any time which will affect your debt service ratio‘s.

Student Loans

If you have an active student loan payment the lender will calculate a portion of the balance into your debt load. Most student loans carry low interest rates and more flexible payment schedules.

Spousal Or Child Support Payments

Spousal and child support are monthly payment commitments that lenders factor into your debt service ratio. If you are, however, receiving these payments, a portion will be added to your monthly income amount.

How well you pay your debt back will either secure your pre-approval or destroy it.

The way that you manage your debt is reflected by your credit score and will affect your overall monthly debt service ratio, both are used by lenders to pre-approve you for a mortgage. Regardless of the debt that you have, being realistic with your finances will help you keep a consistent payment schedule which will give you a healthy credit picture. The longer you present positive history of paying debt the easier it will be for you to get a good lender with a great rate.

If you want to buy a home our mortgage experts can help you with any questions that you may have and regardless of your circumstances, we can quickly process your pre-approval, so you know exactly where you stand. We look forward to hearing from you.