Some of the last rounds of changes from the government regarding qualifying for a mortgage made an impact on how your line of credit affects the mortgage application. Lenders are now required to use 3% of the balance as the monthly debt repayment obligation when determining how much of a mortgage you can afford.  They cannot simply use the actual minimum payment required, which is usually lower than 3% of the balance.

Let’s do some simple math; if you owe $10,000 we have to use $300 as your monthly payment regardless of what the bank requires as a minimum. Given that the banks hand out lines of credit on a regular basis it is not uncommon for us to see $50,000 lines of credit with balances in the $40,000 range. That amount then means we have to use $1,200 a month as a payment even though the bank may require considerably less.

So what if it is a secured line of credit? Again we have clients telling us that they don’t have a mortgage only to realize they do have a Home Equity Line of Credit (HELOC). A home equity line of credit by all definition is a loan secured by a property.

Again, it’s something the bank will require little more than interest payment on because it is secured. The calculation here can also upset the calculation for your next mortgage, as what is required by many lenders is to take the balance of the HELOC. Let’s say the balance is $200,000 and you convert it to a mortgage at the bench mark rate, which today is 5.34% with a 25-year amortization. That without any fees would be equal to $1202.22 per month, so what in the client’s mind may be a $400 or $500 dollar interest payment for the purpose of qualifying will actually end up being almost three times higher.

This one change to supposedly safe guard the Canadian consumer has lately been the thing we have seen stop more mortgages than just about anything else. If you have any question, contact a Dominion Lending Centres mortgage professional for answers.