How Debt Impacts Your Borrowing Power

Tim Lyon • September 22, 2025

Have you ever wondered how your car loan, credit card balance, or line of credit might affect your ability to qualify for a mortgage? For many buyers, non-mortgage debts play a bigger role than they realize in shaping what lenders will approve.

In this blog, we’ll break down how debts impact your borrowing power, why lenders look closely at them, and what practical steps you can take if you’re preparing to buy a home.


Understanding Borrowing Power

Your borrowing power is primarily determined by your income. If you earn $1,000 per month, no lender will approve a loan requiring $990 in monthly payments, because that would leave you only $10 for all other expenses—a clear recipe for financial trouble.

There are two thresholds lenders look at to evaluate your maximum mortgage:

  • The first is the Gross Debt Service (GDS) ratio, which typically allows about 39% of your gross income to go toward a stress-tested mortgage payment and housing costs.
  • The second is the Total Debt Service (TDS) ratio, which looks at all debts combined. It is typically capped around 44% of your gross (before-tax) income and includes:
  • Stress-tested mortgage payment
  • Property taxes
  • Heating costs
  • Any other monthly debt payments


How Debts Reduce Borrowing Power

For insured mortgages that follow the standard thresholds of 39% and 44%, you can have the equivalent of 5% of your gross income in additional debts before they start to reduce your borrowing power.

For uninsured mortgages, exceptions can often increase the GDS limit to 44%, meaning any additional debts directly reduce your borrowing power.

Because of this 44% threshold, every dollar of monthly debt requires about $2.27 in additional monthly income to offset it. Since most people can't quickly increase their income, let's look at how debts reduce your borrowing power.


Key Math

Every $100 in monthly debt payments reduces your mortgage borrowing power by approximately $13,500.
(Calculation based on a 4.5% interest rate with a 6.5% stress test qualification and 25-year amortization)

That means:

  • A $500/month car loan = about $67,000 less borrowing power
  • A $200/month line of credit = about $27,000 less borrowing power

Note: Credit cards that are paid off in full each month do not impact your borrowing power. However, carrying a balance will work against you.


Key Benefits of Managing Debt Wisely

• Maximize home options – Less debt means more borrowing room for your mortgage.
• Lower stress during approval – Fewer debts make qualification smoother.
• Flexibility in budgeting – Reduces the risk of stretching yourself too thin financially.


Important Considerations

• Not all debt is bad — car loans, student loans, or lines of credit can make sense at the right time.
• The danger comes when new debts are added while you’re actively shopping for or closing on a home — this can jeopardize approval.
• Always talk with your mortgage broker before taking on new credit if you plan to buy soon.



Real-World Example

Scenario:

  • Couple with household income of $100,000
  • 20% down payment
  • Already carrying a $400/month car loan

Impact:

  • Without the loan, they could qualify for around $480,000 mortgage.
  • With the loan, that drops by about $61,000, reducing their maximum approval to $419,000.

That $61,000 difference could determine whether you qualify for your preferred home or have to settle for a less expensive option.


Next Steps

If you’re planning to buy a home soon, review your current debts and see how they may affect your approval. Even small payments can make a big difference in how much you qualify for.

If you’d like a personalized analysis of how your debts might impact your mortgage options, I’d be happy to help.

Book a consultation or call 778-988-8409


Mortgage Term Glossary

Borrowing Power: The maximum mortgage amount a lender will approve based on your income, debts, and other factors.

Equity: The portion of your home you truly own, calculated as home value minus mortgage balance.

Gross Debt Service (GDS) Ratio: A measure of how much of your gross income can go toward housing costs (mortgage payment, property taxes, heating, and sometimes condo fees). Lenders typically cap this at 39%, though exceptions may apply if you have more than 20% down.

Gross Income: How much you make before taxes.

Stress Test: A requirement that you qualify at a higher interest rate than your actual rate, to ensure affordability.

Total Debt Service (TDS) Ratio: A measure of how much of your gross income can go toward all debt obligations (housing costs plus other monthly debt payments). Lenders typically cap this at around 44%, though exceptions may apply if you have more than 20% down.



Need help with your mortgage?



Tim Lyon

Mortgage Consultant

How Pre-Payments Can Save You Time and Money

By Tim Lyon • September 23, 2025
Did you know you could pay off your mortgage years earlier — and save thousands in interest — just by making extra payments? It doesn’t take a massive lump sum to make a big difference. Even small, regular pre-payments can add up over time. In this blog, we’ll look at what pre-payment privileges are, how they work, and how to use them to your advantage. What Are Pre-Payment Privileges? Pre-payment privileges are options built into many mortgages that allow you to pay extra toward your principal balance without penalty. Since regular mortgage payments include both principal (the loan amount) and interest (the cost of borrowing), paying down extra principal early reduces the total interest you’ll pay over the life of your mortgage. Most lenders offer at least one of the following: Lump sum payments (up to a certain percentage of the original mortgage each year) Double-up payments (making two regular payments at once) Payment increases (raising your regular payment by a set percentage) Example: The Impact of a 1% Pre-Payment Let’s say you have a $500,000 mortgage with: 25-year amortization 5.25% interest rate If you make a $5,000 lump sum payment every year (about 1% of the mortgage amount), here’s the difference: With no pre-payments, the numbers look like this: Total Pre-Payments: $0 Total Paid Over Time: $898,871 Interest Paid: $398,872 Time to Pay Off Mortgage: 25 years Now compare that to making just one $5,000 lump sum pre-payment each year : Total Pre-Payments: $95,000 Total Paid Over Time: $806,078 Interest Paid: $306,078 Time to Pay Off Mortgage: 19 years and 8 months That means by making manageable yearly pre-payments, you’d save almost $93,000 in interest and become mortgage-free more than 5 years earlier . Other Pre-Payment Options Double-Up Payments This option lets you double your regular mortgage payment whenever you choose, accelerating principal repayment significantly. Payment Increase Privilege Most lenders allow you to increase your regular payment by up to 15% once per year. Which can be a manageable and consistent way to get ahead because the additional payment still goes directly towards the principal. Why Pre-Payments Matter Save Thousands: Reduce the lifetime interest you pay Pay Off Faster: Shorten your mortgage term by years Build Equity Quicker: Increase the value you own in your home sooner Things to Keep in Mind Every lender has different rules about when and how you can make pre-payments Some allow flexible payments anytime; others limit them to specific dates Minimum pre-payment amounts usually apply (often $100 or more) If you’re not sure about your lender’s policy, ask — or I can help you find out. Quick Summary • Lump Sum Payments: Extra payments directly against your mortgage balance • Double-Up Payments: Pay twice your regular installment for faster repayment • Payment Increases: Raise your monthly payment within set limits • Bottom Line: Even small pre-payments can add up to big savings over time Next Steps If becoming mortgage-free faster sounds appealing, review your pre-payment options and start small. Even $100 extra here and there can have a meaningful impact. If you’d like help building a pre-payment strategy that fits your budget, I’m here to guide you. Book a consultation or call 778-988-8409 .  Mortgage Term Glossary Amortization: Total length of time to fully repay your mortgage (usually 25–30 years in Canada) Interest: The cost of borrowing money, charged by the lender as a percentage of your loan balance Lump Sum Payment: An extra payment made directly toward your mortgage balance Payment Increase Privilege: An option to raise your regular mortgage payments within lender limits Pre-Payment Privilege: Contractual allowance to make extra payments without penalty Principal: The original loan amount, not including interest

Open Mortgages: What They Are and When to Use Them

By Tim Lyon • September 18, 2025
What is an Open Mortgage? In Canada, most mortgages are "closed" mortgages, meaning you'll face a penalty if you want to pay them off early. An open mortgage is different - it can be paid off at any time without penalty. However, this flexibility comes at a cost. Open mortgage rates are significantly higher than closed mortgage rates because lenders need to account for the possibility that you might pay off the entire balance at any time. This makes open mortgages unsuitable as a long-term strategy. When Open Mortgages Make Sense There are two main scenarios where an open mortgage can be a smart short-term solution: Planning to Sell Soon After Renewal If you're planning to sell your home within a month or so of your renewal date, it makes sense to renew into an open mortgage. This way, when your property sells, you can pay off the mortgage immediately without penalty. An alternative strategy is to renew your entire mortgage into a HELOC (Home Equity Line of Credit) if you qualify. A HELOC typically offers a lower rate and requires only interest payments, making it less expensive. However, not every lender offers HELOCs and not every borrower will qualify. Switching Lenders at Renewal The most common use case for open mortgages is when switching lenders at renewal. Sometimes its hard to make the dates line up exactly. For example if your renewal date is on a weekend or if you are on vacation or if we need a few extra days to get the new mortgage completed. In these situations, you would instruct your current lender to renew your mortgage into an open mortgage. A few days later, when we complete the switch to your new lender, the open mortgage gets paid out without penalty. Although the rate is high, since it's only for a few days, the overall cost remains minimal. I actually ask all my clients who are switching lenders at renewal to ask their existing lender to renew their mortgage into an open mortgage, even if we plan to align the dates perfectly. That way if there is a slight delay of a day or two they aren’t automatically renewed into a new closed mortgage by the existing lender. Quick Summary Key Benefits of Open Mortgages No penalties for early repayment – flexibility to sell or switch anytime Short-term solution for timing issues – useful during renewals and transitions Peace of mind – no risk of being stuck in a costly closed mortgage if plans change suddenly Important Considerations High rates (often double closed mortgage rates) make them unsuitable for long-term use Limited availability compared to standard closed mortgages Best used strategically for short-term situations like selling or switching lenders Example Imagine your mortgage is up for renewal, but you’re switching lenders and the process runs a few days past your renewal date. If you renew into a closed mortgage with your current lender, you could face penalties when you switch a few days later. If you renew into an open mortgage, you pay a slightly higher rate for those few days but avoid penalties altogether. Mortgage Term Glossary Closed Mortgage : A mortgage with restrictions on early repayment, usually with penalties for breaking the term. HELOC (Home Equity Line of Credit) : A revolving credit line secured by your home, typically at lower rates than an open mortgage. Mortgage Renewal : The process of negotiating a new term for your mortgage once your current one expires. Penalty : A fee charged by lenders if you break or pay off a closed mortgage early.