There have been many changes with respect to mortgage qualifications in Canada. Above and beyond the 4 major changes announced by the Minister of Finance over 4 years, there have been changes on the backend on how lenders qualify applicants. The most recent one is mind boggling!
Investment Property Mortgage Qualification
For an applicant reporting a surplus on their T1 general (line 126), the surplus (line 126) is added to their income.
Example: Applicant's income is $100,000 and line 126 is showing $5,000, total applicant's income is $105,000. If the applicant owns other investment properties, here is the part that makes no sense: The principal portion off the annual mortgage statement is deducted from applicant's income!
Example: Applicant has paid down $10,000 of mortgage principal in the previous year, total income: $100,000 plus $5,000 less $10,000 = $95,000. This rule effectively penalizes real estate investors who build equity in their investment properties. Last time I checked statements made by Minister of Finance, Bank of Canada, Bankers..... they all advocate paying down debt and building equity now while interest rates are low (Canadians are at record high debt to income ratio).
This rule effectively encourages not paying down mortgage principal. Had the applicant paid more interest than principal in the previous year, the mortgage principal deduction would have been less and therefore their net income higher!
If you are thinking of showing a loss on line 126, it's even worse: Income less loss on line 126 less mortgage principal.
Are you confused and frustrated with all these guidelines? Rest assured this is what I do on a daily basis and I am here to help you navigate through the mortgage qualification land mines to build your real estate investment portfolio. It's all in the setup.....Happy Investing!
