Understanding How Different Debts Affect Your Mortgage Approval in Canada

Buying a home is a huge milestone—but getting approved for a mortgage? That’s where things can get a bit nerve-wracking, especially when you’ve got existing debts on your plate.
Whether it’s your student loan, car EMIs, or even that sneaky credit card balance, lenders in Canada take a hard look at everything before giving the green light. So, if you’re wondering how your debts could affect your chances of qualifying for a mortgage, you’re in the right place.
Let’s break it down in plain English—no jargon, no fluff.

Why Debt Matters in the Mortgage Approval Process

When you apply for a mortgage, lenders don’t just look at how much you earn. They look at how much you owe and how well you’re handling it.
They’re essentially asking: “Can this person afford to take on more debt—like a home loan—without defaulting?”
That’s where your credit score, income, and most importantly, your debt-to-income ratio (DTI) come into play. The more debt you have, the less room there is in your budget for mortgage payments.
If your debt load is too high, your application might be declined, or you might only qualify for a smaller mortgage amount.

How Lenders Measure Your Debt: GDS vs TDS

1. Gross Debt Service (GDS) Ratio:
This is the percentage of your income that goes towards housing costs—like mortgage payments, property taxes, heating, and condo fees.

2. Total Debt Service (TDS) Ratio:
This includes everything in the GDS, plus all your other debts—credit cards, student loans, car loans, etc.
Here’s a quick example:
If your monthly income is $6,000 and all your housing costs + debts total $2,400, your TDS is 40%.
Pro tip:
For most lenders, the recommended thresholds are:

• GDS: Max 32% (up to 39% if your mortgage is insured)
• TDS: Max 40% (up to 44% with insurance)

If you’re above those, it’s time to revisit your debts.

1. Credit Card Debt

Got a balance sitting on your credit card? Even if you pay more than the minimum every month, lenders will still assume a standard minimum payment—typically 3% of the total balance—for your TDS calculation.
So if your balance is $10,000, lenders will count $300/month as part of your debt load—even if you plan to pay it off before applying.
Why it matters:

• High credit card balances lower your credit score.
• Using more than 30% of your limit is a red flag to lenders.
• Even a “zero interest” card can drag down your approval odds if the balance is high.

2. Student Loans

Student loans aren’t inherently bad—but how they’re reported matters.

• If your loan is in repayment, lenders will count the actual monthly payment amount.
• If it’s not in repayment yet, they’ll often calculate 1% of the total balance as a stand-in monthly payment.

So if you owe $40,000 and haven’t started repaying yet, lenders might count $400/month toward your debt load—even though you’re not actively paying anything yet.
Tip: Before applying for a mortgage, consider making small, regular payments to show consistent repayment behaviour.

3. Car Loans and Leases

This one’s a biggie. Car loans can really hurt your mortgage approval odds because:

• They have fixed monthly payments.
• Lenders always factor the full payment amount into your TDS, no exceptions.

A $600/month car payment could drastically lower the amount you’re approved for—even if you’ve never missed a payment.
Tip: If you can, pay off your car loan before applying. Or choose a less expensive vehicle to lower your monthly commitment.

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How Lenders Treat Other Types of Debt

Type of Debt	How It’s Calculated in Mortgage Application
Lines of Credit < $50,000	3% of the outstanding balance
Lines of Credit > $50,000	Amortized over 25 years at BoC benchmark rate (currently 5.25%)
Student Line of Credit	1% of the total balance
Child or Spousal Support	100% of the monthly payment is included in TDS
Leases	Monthly lease payment is fully counted

These add up quickly. So even if your income looks strong on paper, a high combined debt load can slash your mortgage eligibility in half.

Want a Better Chance at Approval? Tackle These First

If you’re prepping to apply for a mortgage soon, here’s how to improve your odds:

• Pay off high-interest debts first, like credit cards.
• Avoid financing a car right before applying for a mortgage.
• Hold off on new credit applications to avoid lowering your score.
• Ask your student loan provider if you can reduce your monthly payment temporarily.
• Aim for a TDS below 40% and a GDS below 32%.

Even a small reduction in monthly debt payments can open the door to a larger mortgage approval amount.

Frequently Asked Questions

Should I pay off my car loan before applying for a mortgage?
Yes, if possible. Eliminating a fixed $500–$700 monthly obligation could boost your mortgage affordability significantly.
What about reducing my student loan payments?
If you’re in repayment, talk to your provider about temporarily lowering your payments before applying. This will improve your TDS ratio, making it easier to qualify.
Do credit card balances really hurt that much?
Yes. Even a $5,000 balance could show up as a $150/month expense in your TDS—whether or not you plan to pay it off soon.
Can I ignore debt if I have a big down payment?
Not quite. A larger down payment helps, but lenders still need to ensure your income supports both mortgage payments and existing debts.

Final Thoughts: Debt Doesn’t Disqualify You—But It Does Limit You

Having debt doesn’t automatically kill your chances of getting a mortgage. In fact, many Canadians have student loans, car loans, or credit card balances when they buy a home.
But the type of debt, size of monthly payments, and how well you manage it will directly impact how much you can borrow—and what kind of mortgage rate you’re offered.
Before applying, do a quick “debt detox.” Clean up what you can, prioritize high-interest obligations, and reach out to a mortgage expert to walk you through your best options.

Carrying Debt? Here’s What It Means for Your Mortgage Approval

Not all debts are treated equally by lenders. Learn how credit cards, car loans, student loans, and lines of credit impact your approval — and how to improve your chances of qualifying for the mortgage you want.
See How Your Debts Affect Approval