CONSUMER CREDIT 2024

WEEK #6
AGENDA
•Recap of Last Class
•HELOC/ Refinancing Limits
•Co-borrower / Guarantor
•Income & Employment Verification
RECAP
Types of Mortgages
 Conventional - 20% down payment
 High Ratio Mortgage – less than 20% (requires default mortgag Insurance)

Mortgage Default Insurers:

 Canada Mortgage and Housing Corporation (CMHC)
 Sagen
 Canada Guaranty Mortgage Insurance Company

Mortgage Stress Test

 The qualifying rate for a mortgage application is the higher of the benchmark
rate (5.25%), or the rate the lender is offering plus 2%
RECAP
Down Payments
 Savings (TFSA, FHSA)
 Existing Home Equity
 Gifted Down Payment
 Home Buyers’ Plan (HBP)
 First-Time Home Buyer Incentive
Closing Costs (typically 2%-
4%)
 Home Inspection (Optional)
 Property Appraisal
 Title Insurance
 Deed Transfer Tax
 Legal Fees
Porting a Mortgage
When you transfer an existing mortgage to a
new property, and the terms and rate remain
the same
Assuming a Mortgage:
When the mortgage is transferred from the
seller to the buyer with all terms staying the
same
Refinancing a Mortgage:
when the terms and conditions of an
existing mortgage agreement are
replaced with new terms and conditions
before the mortgage term is due
 RECAP – CALCULATING
MORTGAGE INSURANCE
Example: Let’s say you purchased a house for $465,000 and made a Loan–to-Value
Standard
Purchase
down payment of $32,000. You require mortgage default insurance Premium
and will be including the premium in your total mortgage. Up to and
0.60%
including 65%
1) First calculate the Down Payment % Up to and
1.70%
including 75%
2) Calculate the actual Loan to Value (LTV)% Up to and
2.40%
including 80%
3) Next, calculate your mortgage amount Up to and
2.80%
including 85%
4) Lastly, calculate the mortgage insurance premium Up to and
3.10%
including 90%

5) Therefore, the total mortgage required will be Up to and

including 95%
4.00%
Traditional
Down Payment
 RECAP – CALCULATING
MORTGAGE INSURANCE
Example: Let’s say you purchased a house for $465,000 and made a down payment of Loan–to-Value
Standard
$32,000. Purchase
Premium
1) First calculate the Down Payment $32,000/$465,000 = 6.88% Up to and
0.60%
Down Payment including 65%

Up to and
2) Calculate the actual Loan to Value (LTV) = 100% - 6.88%= including 75%
1.70%

93.12% Up to and
2.40%
including 80%
3) Next, calculate your mortgage amount $465,000 - $32,000 =
$433,000 Up to and
including 85%
2.80%

4) Lastly, calculate the mortgage insurance premium= $433,000 x Up to and

3.10%
4% = $17,320 including 90%

Up to and
5) Therefore, the total mortgage required will be including 95%
4.00%
Traditional
$433,000 + $17,320 = $40,320 Down Payment
HOME EQUITY LINE OF
CREDIT (HELOC)
There are 2 main types of HELOCs: one that’s combined with a mortgage, and
one that’s a stand-alone product.

1. Home equity line of credit combined with a mortgage

This combines a revolving HELOC and a fixed term mortgage.
You usually have no fixed repayment amounts for a HELOC. Your lender will
generally only require you to pay interest on the money you use.
The fixed term mortgage will have an amortization period. You have to make
regular payments on the mortgage principal and interest based on a schedule.
The credit limit on a HELOC combined with a mortgage can be a maximum of
65% of your home’s purchase price or market value. The amount of credit
available in the HELOC will go up to that credit limit as you pay down the
principal on your mortgage.

(Financial Consumer Agency of Canada, 2023)

HOME EQUITY LINE OF
CREDIT (HELOC)
2. Stand-alone home equity line of credit
A stand-alone HELOC is a revolving credit product guaranteed
by your home. It’s not related to your mortgage.

The maximum credit limit on a stand-alone HELOC:

can go up to 65% of your home’s purchase price or market
value
won't increase as you pay down mortgage principal

(Financial Consumer Agency of Canada, 2023)

BUYING A HOME WITH A HOME
EQUITY LINE OF CREDIT
COMBINED WITH A MORTGAGE
You can finance part of your home purchase with your HELOC, and part
with the fixed term mortgage.
You need a 20% down payment or 20% equity in your home. You’ll need
a higher down payment or more equity if you want to finance your home
with just a HELOC. The portion of your home that you can finance with
your HELOC can’t be greater than 65% of its purchase price or market
value. You can finance your home up to 80% of its purchase price or
market value, but the remaining amount above 65% must be on a fixed
term mortgage.
For example, you purchase a home for $400,000, make an $80,000 down
payment and your mortgage balance owing is $320,000. The maximum
you’d be allowed to finance with your HELOC is $260,000 ($400,000 x
65%). The remaining $60,000 ($320,000 - $260,000) needs to be
financed with a fixed term mortgage.

(Financial Consumer Agency of Canada, 2023)

OVERVIEW OF THOUGHTS
OF HELOCS
Many Canadians using their homes as ATMs

https://youtu.be/fdJ1HC7eWbw
QUALIFY FOR A HOME
EQUITY LINE OF CREDIT
You only have to qualify and be approved for a HELOC once.
After you’re approved, you can access your HELOC whenever
you want.

You’ll need:
a minimum down payment or equity of 20%, or
a minimum down payment or equity of 35% if you want to use
a stand-alone HELOC as a substitute for a mortgage
LET’S PRACTICE…
Bruno’s home is valued at $420,000. He has a mortgage
balance of $85,000.
1. What is the maximum amount he could refinance his
mortgage for?
2. How much additional funds can he access? (assuming he is
refinancing)
3. What is the maximum limit on the HELOC (assuming the
mortgage is paid off?
4. What is the current amount he would be able to access on
the HELOC (assuming mortgage still exists)?
ANSWER
Bruno’s home is valued at $420,000. He has a mortgage balance of
$85,000.
1. What is the maximum amount he could refinance his mortgage for?
$420,000 * 80% = $336,000
2. How much additional funds can he access? (assuming he is
refinancing) $336,000 - $85,000 = $251,000
3. What is the maximum limit on the HELOC (assuming the mortgage is
paid off? $420,000 * 65% = $273,000

4. What is the current amount he would be able to access on the

HELOC (assuming mortgage still exists)?
$336,000 - $85,000 = $251,000
(It is below 65% LTV therefore he can access the full $251,000)
LET’S PRACTICE…
Sam's home is valued at $650,000. He has a mortgage balance
of $400,000.
1. What is the maximum amount he could refinance his
mortgage for?
2. How much additional funds can he access? (assuming he is
refinancing)
3. What is the maximum limit on the HELOC (assuming the
mortgage is paid off?
4. What is he current amount he would be able to access on
the HELOC (assuming mortgage still exists)?
ANSWER
Sam's home is valued at $650,000. He has a mortgage balance of
$400,000.
1. What is the maximum amount he could refinance his mortgage
for? $650,000 * 80% = $520,000
2. How much additional funds can he access? (assuming he is
refinancing) $520,000 - $400,000= $120,000
3. What is the maximum limit on the HELOC (assuming the
mortgage is paid off?
$650,000 * 65% = $422,500
4. What is the current amount he would be able to access on the
HELOC (assuming mortgage still exists)?
$520,000 - $400,000 = $120,000
(It is below 65% LTV therefore he can access the full
$120,000)
LET’S PRACTICE…
Moe’s home is valued at $290,000. He has a mortgage balance of
$25,000.
1. What is the maximum amount he could refinance his
mortgage for?
2. How much additional funds can he access? (assuming the
mortgage still exists)
3. What is the maximum limit on the HELOC? (assuming the
mortgage is paid off)
4. What is the current amount he would be able to access on the
HELOC? (assuming mortgage still exists)
ANSWER
Moe’s home is valued at $290,000. He has a mortgage balance of
$25,000.
1. What is the maximum amount he could refinance his mortgage for?
$290,000 * 80% = $232,000

2. How much additional funds can he access? (assuming the

mortgage still exists)
$232,000 - $25,000 = $207,000

3. What is the maximum limit on the HELOC? (assuming the mortgage

is paid off)
$290,000 * 65% = $188,500

4. What is the current amount he would be able to access on the

HELOC? (assuming the mortgage still exists)
max HELOC = $188,500 (Although the additional funds he can
access is $207,000, he can only access 65% of the home value on
DOCUMENTATION FROM
CLIENTS
In order to complete a credit application, you must obtain the
following documentation.

oGovernment approved photo identification

oProof of income & employment
• Letter of employment
• Pay stubs
• T4s/ T5s /T3s
• Notice of assessment with corresponding T1 General
oCredit report
oProof of assets
DOCUMENTATION FROM
CLIENTS
Additional documents for new mortgage applications:

oName and contact information of lawyer

oThe Agreement of Purchase and Sale
oProof of down payment
oThree months’ bank statements / Investment statements
oIf the down payment is a gift, details on who the gift is from with a signed
gift letter
oWithdrawal from RRSP through Home Buyers’ Plan
oApproval of Home Buyers Incentive
DOCUMENTATION FROM
CLIENTS
Additional documents for mortgage refinance/ home equity
applications:

oMortgage statement
oProperty tax statement (confirmation taxes are paid up to date)
oLegal description of property
oProof that property management fees are up to date on a condo or
apartment
oConfirmation of a rental agreement, if applicable
VERIFYING INCOME –
VARIABLE INCOME
Variable Income is income that is not consistent.
When verifying variable income, lenders will typically look at the two
most recent years of income. In this case, the amount of income used
will be the lower of the two-year average, or the most recent years
income documents.
Variable income can include:
 Commission
 Bonus
 Overtime
 Seasonal
 Contract
 Casual
 Part-time
 Self employed (sole proprietor/ partnership)
 Investment Income (dividends, interest, etc.)
VERIFYING INCOME –
FIXED INCOME
Fixed income is income that is consistent and guaranteed, with no
variable component to it.
This income can be verified looking at the most recent years income
documents.

o Fixed incomes can include:

o Pension
o Salary
o Full time hourly
o Rental income
o Investment income (fixed payments from registered account
o Part-time (with a fixed hour arrangement)
VERIFYING INCOME
CONTINUED
When verifying your client's income, a current document is required to
verify the client is still employed. This can typically be in the form of:
 Paystub / Pay Statement
 Letter of employment
 Proof of direct deposit

To verify annual income the following documents are often used:

oT4s / T5s / T3s
oNotice of assessment (NOA) with corresponding T1 General

Note: If your client was off on a leave from work or had a change of
employment that doesn’t reflect in the documentation, then you will
need to verify their income with their employer. A letter of
employment is usually required for this.
CO-BORROWERS &
GUARANTORS
Co-Borrowers
This is someone that is joint on the credit. The are directly
benefitting from the credit and are also liable.
Guarantors
This is someone who gives a personal guarantee to back a
loan/mortgage for another person. They are used to
strengthen an application. They are liable if the borrower
defaults, but they do not benefit from the credit. Many
institutions require guarantors to get independent legal
advice as it’s important for them to understand their
obligation.
LET’S PRACTICE
Your client Pat is working as a Nurse and regularly works
overtime. He is applying for a loan and has provided you T4s
for 2023 and 2022.
2023 = $79,500
2022 = $57,300

What amount of income would be used for the application?

LET’S PRACTICE
Your client Pat is working as a Nurse and regularly works
overtime. He is applying for a loan and has provided you T4s for
2023 and 2022.
2023 = $79,500
2022 = $57,300

What amount of income would be used for the application?

($79,500 + $57,300) / 2 = $68,400
*The 2-year average rule would apply, as he made more in the
most recent year. You use the lesser of the 2-year average OR the
most recent year income for variable income.
LET’S PRACTICE
Your client Sally is working as a Sales Manager and gets an
annual bonus on top of her salary. She is applying for a
mortgage and has provided you T4s for 2023 and 2022.
2023 = $105,000
2022 = $126,200

What amount of income would be used for the application?

LET’S PRACTICE
Your client Sally is working as a Sales Manager and gets an
annual bonus on top of her salary. She is applying for a
mortgage and has provided you T4s for 2023 and 2022.
2023 = $105,000
2022 = $126,200

What amount of income would be used for the application?

$105,000
*You use the lesser of the 2 year average OR the most recent
year income for variable income.
LET’S PRACTICE
Your client Georgia is applying for a loan. She provides you
with her 2023 and 2022 T4s. Does this verify she is currently
employed?
LET’S PRACTICE
Your client Georgia is applying for a loan. She provides you
with her 2023 and 2022 T4s. Does this verify she is currently
employed?
No.
Although you may use these documents to verify the amount
of income for the application, you would also require a recent
document to prove she is still actively employed.
These can include:
 Paystub
 Letter of employment
 Proof of direct deposit
LET’S PRACTICE
Your client Luis is applying for a car loan but has some
derogatory items on his credit report that prevent you from
approving the credit solely in his name. He asks his father to
be added to the application. Would his father be considered a
co-borrower or guarantor?
LET’S PRACTICE
Your client Luis is applying for a car loan but has some
derogatory items on his credit report that prevent you from
approving the credit solely in his name. He asks his father to
be added to the application. Would his father be considered a
co-borrower or guarantor?

Guarantor
Because he would be liable if the borrower defaults but does
not benefit from the credit.
REFERENCES
CSI. (2013). Personal Lending and Mortgages. 2013 CSI Global Education Inc.

Deed Transfer & Property Tax | Access Nova Scotia | Government of NS. (2022). Novascotia.Ca.https://novascotia.ca/sns/access/land/deed-transfer-property-tax.asp

Financial Consumer Agency of Canada. (2023, December 1). Getting a home equity line of credit. Canada.ca. https://www.canada.ca/en/financial-consumer-agency/services/
mortgages/home-equity-line-credit.html

Financial Consumer Agency of Canada. (2021b, June 28). How much you need for a down payment - Canada.ca. Canada.Ca. https://www.canada.ca/en/financial-
consumer-agency/services/mortgages/down-payment.html

Financial Consumer Agency of Canada. (2021b, June 28). Interest on mortgages - Canada.ca. Canada.Ca. https://www.canada.ca/en/financial-
consumer-agency/services/mortgages/interest-on-mortgages.html

Financial Consumer Agency of Canada. (2021b, July 13). Preparing to get a mortgage - Canada.ca. Canada.Ca. https://www.canada.ca/en/financial-consumer-
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Financial Consumer Agency of Canada. (2022a, May 12). Summary of key messages. Canada.ca. Retrieved February 11, 2023, from https://www.canada.ca/en/financial-
consumer-agency/services/financial-toolkit/mortgages/mortgages-1/5.html

Financial Consumer Agency of Canada. (2022a, May 12). 5.2.14 Payment options. Canada.ca. Retrieved February 11, 2023, from https://www.canada.ca/en/financial-consumer-
agency/services/financial-toolkit/mortgages/mortgages-2/15.html

Mortgage loan insurance and premiums. (2022). Cmhc-Schl.Gc.Ca. https://www.cmhc-schl.gc.ca/en/professionals/industry- innovation-and-leadership/industry-expertise/

resources-for-mortgage-professionals/mortgage-loan-insurance-and- premiums

Protect the Ownership of Your Home with Title Insurance. (2022). Rbcroyalbank.Com. https://www.rbcroyalbank.com/mortgages/title- insurance.html

Trust, H. (2020, December 11). Demonstrating the Source of Your Down Payment. Home Trust. https://www.hometrust.ca/blog/demonstrating-the-source-of-your-
down-payment/