How Different Types of Debt Affect Your Mortgage Approval

Dreaming of owning a home or upgrading to a new one? Your debt plays a significant role in the mortgage approval process. Here’s how lenders view your debt when you’re looking to buy or refinance a property in Canada.


Not All Debt is Treated Equally by Lenders

Do you have debt? You’re not alone. According to a TransUnion Canada report, around 92% of credit users carry a balance, which has increased by 3.7% from last year. Higher interest rates have also caused payments on credit cards to rise by 11%, auto loans by 6%, and lines of credit by 13%. Additionally, the surge in new Canadian residents has led to a 46% increase in credit accounts from 2022 to 2023.

A good credit history and effective debt management can help you secure a mortgage loan, qualify for a higher home-price amount, or obtain a lower interest rate. However, different types of debt can impact your mortgage pre-approval in various ways.

How Lenders View Different Types of Debt

Lenders typically assess debt in two ways: they either consider the entire balance or the actual monthly payment. Here’s a breakdown of how different debts affect your mortgage application:

Federal Debt

Canada Revenue Agency (CRA): This type of debt must be paid off as soon as possible. Owing back taxes or being in arrears can halt your mortgage pre-approval until the debt is cleared.

Credit Card and Line of Credit Debt

Revolving, Unsecured: Lenders often look at the entire balance to calculate a monthly payment amount, regardless of what you actually pay. High balances can significantly impact your borrowing potential.

• Credit Card Debt: Lenders prefer regular payments on this type of debt. Avoid spending more than 75% of your limit and try to pay off balances frequently.
• Line of Credit (LOC): Some lenders calculate based on the entire limit, not just the balance, which can increase your debt service ratios.

Mortgage Debt

Secured, Monthly Payment: As an installment debt typically paid over many years, lenders use your potential or actual monthly payment to assess affordability. Despite being a large financial commitment, it may factor less into your debt ratios compared to high revolving credit balances.

Instalment Debt

Secured, Monthly Payment: Examples include vehicle loans with fixed payments over 1 to 8 years. These fixed payments are easier to budget for and less volatile than revolving credit, affecting your debt service ratios based on monthly amounts rather than total balances.

Home Equity Line of Credit (HELOC)

Revolving, Secured: Unlike unsecured LOCs, HELOCs are secured by your home and used for larger expenses or consolidating higher-interest debt. Lenders calculate this debt like a mortgage, making it less impactful on your pre-approval than unsecured LOCs, though it still affects your debt service ratios.

Student Loans

Entire Balance: Lenders factor a portion of your student loan balance into your monthly debt load. Despite typically lower interest rates and flexible payback schedules, student loans are less impactful than high-interest debts like credit cards.

Spousal or Child Support Payments

Monthly Payment: If you’re paying these, they’re included in your debt service ratio. If you’re receiving them, a portion is added to your monthly income.

Managing Debt for Mortgage Approval

Ultimately, how you manage your debt influences your credit score and debt service ratios, which are crucial for mortgage qualification. Regular, consistent payments and a realistic budget will help maintain a healthy credit profile.

Checking Your Credit Report

Curious about your credit status? Check your report for free with Equifax Canada.