A Car Loan Now and a Mortgage Later: How the Car Payment Counts

Yes, the payment counts. FCAC says: “Mortgage lenders and mortgage brokers use your financial information to calculate your monthly housing costs. They also calculate your total debt load.” CMHC says what goes into that debt load: “Other debt obligations include revolving credit (i.e. credit card debts, lines of credit), personal loans or car loans, etc.”

It is the monthly payment that counts. CMHC’s wording is “payments on all other debt”. Other lenders do a similar sum. One bank’s page says: “Your DSR indicates the percentage of your current monthly income that goes toward paying off debt.”

A mortgage lender looks at your credit too. FCAC says: “A potential lender will look at your credit report before approving you for a mortgage.” If you do not have a good credit score, it says the mortgage lender may “refuse to approve your mortgage” or “require that someone co-sign with you on the mortgage”.

Two ratios, and the car payment sits in the second. CMHC says: “CMHC restricts debt service ratios to 39% (GDS) and 44% (TDS).” FCAC describes them this way:

• “Your total monthly housing costs shouldn't be more than 39% of your gross household income. This is the gross debt service (GDS) ratio.”
• “Your total debt load shouldn't be more than 44% of your gross income. This includes your total monthly housing costs plus all of your other debts. This is the total debt service (TDS) ratio.”

These are limits for the mortgages CMHC insures. Other lenders have their own rules. FCAC says: “Each lender sets their own lending guidelines and policies.” It also says: “You may still qualify for a mortgage even if your TDS ratio is slightly higher. However, you’re increasing the risk of taking on more debt than you can afford.” Which limits apply to you is a question for your mortgage broker.

Here is the arithmetic, using CMHC’s total-debt limit. It shows how a debt payment shrinks the room. It is an illustration, not a mortgage estimate.

Say a household earns $7,000 a month before tax. 44% of that is $3,080 a month for housing costs and every debt together. Take off the car payment, and what is left has to cover the housing costs and all your other debts.

Example, not an offer and not a mortgage estimate. Both cars use a 72-month loan at the Subprime example rate of 16.9% APR; rates run from 4.99% APR (prime) to 29.9% APR (deep subprime). The pay and the prices are examples.

The $28,000 car uses $222 a month more of that room than the $18,000 car. That is money that cannot go to housing costs or other debts. For scale, our rule of thumb for a car payment is about 15% of gross pay, and a payment well under it leaves more room.

Other debts count too. CMHC lists credit card debts, lines of credit and personal loans next to car loans, and FCAC adds student loans and child or spousal support. To try your own car numbers, use the payment calculator. To see what your pay can carry, read the loan size your pay can carry at each score band.

It is part of the record a mortgage lender reads. FCAC says your credit report shows “if you make your payments on time or miss payments”, and that your score “goes up when you pay bills on time and use credit responsibly”. CMHC says: “A good credit report and credit score are important factors in determining whether or not you will be approved for a mortgage.” Its advice to borrowers includes: “Pay your bills in full and on time.”

We cannot say how much one loan changes a mortgage decision. That depends on the lender and on your whole file. For how a car loan can build a payment history, read how car payments build credit.

Each one leaves the report on its own schedule. FCAC says:

• On a debt management plan: “Credit bureaus remove this information from your credit report 2 years after you finish paying off your debts.”
• On a consumer proposal: “Equifax and TransUnion remove a consumer proposal from your credit report: 3 years after you’ve paid off all the debts included in the proposal, or 6 years after you sign the proposal (whichever comes first)”.
• On a bankruptcy: “Usually, both Equifax and TransUnion remove a bankruptcy from your credit report 6 years after you're discharged.”

When a mortgage lender will say yes to a file with one of these is a question for a mortgage broker, and we cannot answer it. For what a code on your report means, see R7, R9 and I9 on your credit report. For how car lenders read a proposal or a bankruptcy, see car loans during or after a consumer proposal and bankruptcy car financing.

A mortgage broker can work from your actual file. These questions turn this page into your own numbers.

• Which debt-service limits will you use for me? Are they the 39% and 44% that CMHC lists, or different ones?
• How will you count my car payment: the payment in my contract, or something else?
• If I choose a smaller payment or a bigger down payment on the car, how much more room does that give me?
• What does my credit report look like to you today, and what would you want to see change?
• Does it matter for my application whether I buy the car before or after I apply?

When you are ready for the car side, the quickest start is the online application. We review every application and call you back. Or call us at (825) 736-4438. A bigger down payment lowers the payment; see how down payments work.