How is it that you can have the same income and credit presented to various lenders but have different maximum loan amounts?
Depending on the type of mortgage product, lender, and program, this amount varies greatly. Let’s jump into the different types of mortgages and how these limits are calculated.
You’ve likely heard that if you have less than 20% available as a down payment, you’re required to obtain mortgage insurance. This is provided by one of the three insurers in Canada and is mandatory regardless of which bank your mortgage ultimately ends up with. The insurers have their own guidelines on maximum debt ratios and it’s the same for down payments from 5% to 19.99%. Because of the tight guidelines and no wiggle room, insured mortgages offer the lowest mortgage amounts out of the group.
Uninsured (conventional) mortgages
This type of mortgage is offered to borrowers who are able to provide a down payment of at least 20%. Once this threshold is reached, you are not required to obtain mortgage insurance and, therefore, your affordability is based on the lender guidelines. For the most part, most big banks have the same guidelines in place, although they can exercise discretion when it comes to stretching those numbers, however slightly. Under this umbrella, you can find mortgages by the big banks, credit unions and what are commonly referred to as alternative lenders. Lets break down each type of lender.
A lenders (Big Six)
These are the well-known “Big Six” banks—National Bank of Canada, Royal Bank of Canada, Bank of Montreal, Canadian Imperial Bank of Commerce, Bank of Nova Scotia, and Toronto Dominion Bank—and as balance sheet lenders they have discretion on how they underwrite your affordability. For the most part, though, they stick to the same debt ratio guidelines as insured mortgages, however, they have some wiggle room to extend these rules slightly, unlike on insured mortgages. The main advantage here is the banks can now qualify a borrower on a maximum amortization of 30 years as opposed to the insured cap of 25 years. That extra five years of paying back a loan helps reduce monthly payments and, in turn, increases the mortgage amount a borrower qualifies for.
Credit unions are provincially regulated, unlike the federally regulated Big Six banks. As such, they are able to skirt the latest rules surrounding the mortgage qualifying rate (MQR). What they are able to do is allow clients to qualify for a mortgage based on the contract rate they are offering rather than qualifying under the higher stress test rate (which, as of writing, is 4.79%). The advantages to this program are that it can open up your buying power and you can still get a fairly competitive rate (although slightly higher than uninsured big bank rates). The downside is that some credit unions have local requirements and are often not portable outside of their jurisdiction.
Alternative lenders are banks that can stretch debt ratios farther than either credit unions or A lenders. They often can use unconventional types of income (seasonal, self-employed, commission-based borrowers, etc.) that most other programs would not find eligible under their criteria, and they’re available through mortgage brokers. Rates are higher and terms are typically shorter, however, due to their higher debt ratio allowances they’re your best bet for maximizing your mortgage affordability.