Historical article note: This article was originally published on 2018-04-09. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
"Mr. Wang, I have an unfinished property to be handed over in August this year. I want to get a loan of 1 million. How much income can I report to get a mortgage?" April is the tax filing season, which is the busiest time of the year for accountants. I also receive consultation calls about tax filing and mortgage issues. In a previous public account article, I wrote about the "Ranking of Killers on the Way of Mortgage Application". The killer of Ling Ling Yao account is income.
Canada's federal financial regulatory authorities announced in October 2017 that they would implement a new, more stringent B20 stress test on January 1, 2018, aiming to deleverage low-income households and households that have underreported taxes. They also imposed a sudden stop on a very small number of banks that over-lent to borrowers who did not pay taxes in Canada. The source of the subprime mortgage crisis in the United States is NINJA mortgages. Friends who have watched the movie "The Big Short" should remember the image of the loan broker who provides mortgage solutions for low-income families.
The vast majority of the federal government's revenue comes from income tax, while local government revenue mainly comes from property taxes such as local taxes and land transfer taxes. Families that do not report their income, underreport their income, pay less income tax, and those who do not contribute to the federal government in terms of income tax will now have a difficult time getting a mortgage. Many people are still diligently looking for opportunities to get mortgages without paying taxes. If they want to get away with it, BUT, the loopholes in getting loans without considering income are being closed one by one. Any shortcut will be blocked if too many people take it. The federal government suddenly discovered that in the past few years when the real estate market was active, only local governments benefited, collecting a large amount of land transfer taxes, and land taxes also increased with the rise in housing prices. However, the federal government benefited little. Therefore, it can only benefit from the real estate market by imposing strict requirements on revenue, improving mortgage approval standards, and increasing income tax revenue by the federal government. Once this idea occurs, it is irreversible. As early as January this year, I gave "income" the title of the killer on the mortgage loan road. This is the reason. Let me remind you again that families who do not report their income, underreport their income, and pay less taxes will have a hard time getting a loan because they have touched the cheese of the federal government. Don’t believe the reasons given by the government when the B20 was announced. Interest rates have entered the channel of interest rate hikes. In order to prevent the risk of excessive borrowing, strict stress tests have been implemented. The federal government requires banks to stop raising hawks when they see rabbits, and the policy of not lending money without seeing income is long-term, not temporary.
When banks approve loans, they compare the borrower's monthly "bad debt" with his monthly pre-tax income. If the ratio is lower than 44%, the loan will be approved, and if the ratio is higher than 44%, the loan will be rejected. The public account article has previously introduced that bad debts include: monthly mortgage payments for owner-occupied housing loans, monthly car loan payments, monthly student loan payments, and 3% of credit card consumption. Bad debt plus debt calculated using the stress test method specified in B20 are placed in the numerator, and income is placed in the denominator. The ratio obtained by dividing is called TDSR (total debt service ratio). The upper limit of this ratio is 44%. It can be seen that the larger the denominator, the better, and the smaller the numerator, the better. When a bank approves a loan, what income can be included in the denominator? It becomes clear when we look at the personal income return. Many readers run their own businesses. If the income from the business is not reported to their personal names, they will not be used. Banks will not consider business income when calculating the TDSR of mortgage loans. Therefore, we only need to look at personal tax return income to understand how banks approve loans.
We live in Canada, and everyone has three personal statements describing their situation. 1. Physical examination report; 2. Credit record report; 3. Tax return. Whether your life is good or not, these three tables are your report card. The tax return is T1 general, which is a physical examination form for financial health. It is a pity that some friends have lived in Canada for more than ten years, or even decades, but have never seen their tax returns. It is a wonder that many people dare to sign a contract to buy a house without knowing their income structure or what income the bank can put in the denominator. An applicant called me and said that his annual income was 200,000 yuan. I took a look at his tax return and found that the capital gain from selling the house last year accounted for 180,000 yuan of "income", and his salary income was only 20,000 yuan. "Capital gains" are proceeds from the sale of assets, which, although taxable, are unsustainable income. Capital gains only occur when the property is sold. This "income" was there last year but is gone this year. Therefore, capital gains are definitely not included in the denominator for calculating TDSR. Remember, capital gains on line 127 of T1 cannot be used to support a mortgage application. In addition, all banks do not accept welfare income from lines 117 and 119, especially line 119, which belongs to unemployment benefits and is certainly not considered sustainable income. The easiest thing to identify is salary income. As long as it is T4 income in Canada, it will be reported in line 101 in T1. For borrowers with T4 income, the bank requires the simplest documents: the last two pay stubs and T4 for the past two years. In terms of income determination, applicants with self-employment income are slightly more complicated.
For applicants with self-employment income, the income deemed by the bank is the net income in the past two years. As you can see from T1, it is an income of 135-143. The most typical self-employment income is that of a real estate agent. Some real estate agents consider their income to be "commission income" and include all T4A income in line 166. After deducting business expenses, the net income is included in line 139. The final net income is the gross income minus expenses. For the subsequent income, the bank uses the average income of line 139 in the past two years as the available income and includes it in the denominator. Some real estate agents consider their income to be "business income" and include all T4A income in line 162. After deducting business expenses, the net income is included in line 135. The final net income is also the gross income minus expenses. For the subsequent income, the bank uses the average income of line 135 in the past two years as the available income and includes it in the denominator. Whether it is income on line 135 or 139, there is an attached table (T2125) as a detailed description. The name of this table is Statement of Business or Professional Activities. Each bank has different recognition of the income of self-employed people. Some banks believe that certain items of self-employed business expenses can be added back to net income; some banks agree to add 15% to net income to support mortgage loan applications. Readers can learn about the different regulations of different banks when consulting different banks. In addition, the sentence "average income in the past two years" is very controversial and has two meanings. 1. The last two years refer to the two consecutive years before applying for a loan, for example, 2016 and 2017. If the income in 2017 is higher than 2016, use the average of the two years; if the income in 2017 is lower than 2016, use the income in 2017. Second, the so-called average income must be the income reported in the same line in T1 in the past two years. For example, the same real estate agent recorded income in line 135 in 2016 and line 139 in 2017. That’s it. The bank does not recognize this as verifiable and continuous income.
All banks have their own policies when determining rental income, and they vary. Friends with rental income often find that when consulting whether the next mortgage loan is feasible, the loan amount given by each bank is different. Net rental income is recorded on line 126 of T1, and income from this line generally cannot be used directly to support the next mortgage loan application. The bank will look at the specific income and expense items of each investment property, Statement of real estate rental, which is Schedule T776. When I introduce the T776 form in every lecture, I call this form Victoria Secret, which means that the government has written down all the preferential policies for real estate investment in this form. People who do not invest in real estate and do not take a closer look have no idea that 13 expenses including loan interest for investment properties, apartment management fees, local taxes, etc. can be deducted from gross income. Real estate investment is encouraged by government taxation. This is a sure message. All rumors about the government cracking down on real estate investment are fiction. Because different banks look at rental income very differently, I cannot make a comprehensive summary. What I can tell you is that when looking at rental income, banks are divided into two groups, Wudang and Shaolin. Wudang believes that the cash flow of investment properties is the most important, and loan applications below a certain cash flow will not be approved; Shaolin believes that as long as the borrower's income plus rental income can support the loan, cash flow is not important. I have two suggestions for friends who have income from investment properties: 1. Fill out a separate T776 for each investment property so that the bank can see the source of the income; 2. Do not accrue depreciation CCA, so as to increase the denominator and facilitate application for the next loan.