Qualifying Income for a Mortgage in Canada

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Qualifying Income for a Mortgage: What Lenders Evaluate

Income assessment is at the core of the mortgage qualification process in Canada. The lender must ensure the borrower has sufficient and stable income to cover mortgage payments and all other financial obligations. This assessment is conducted using gross debt service (GDS) and total debt service (TDS) ratios, governed by OSFI's Guideline B-20. The GDS ratio must not exceed 39% of gross income, while the TDS ratio is capped at 44%.

Salaried Employment Income

Income from a permanent full-time salaried position is the simplest type to document and the one lenders consider most reliable. The borrower must provide a recent employment letter confirming the position, gross annual salary, start date, and employment status (permanent, probationary, or contractual). The two most recent pay stubs are also required. For variable income such as overtime, commissions, and bonuses, the lender generally requires a two-year history and uses the average for qualification purposes.

Self-Employment Income

Self-employed individuals, sole proprietors, and corporate shareholders face more rigorous documentation requirements. The lender typically requests the two most recent T1 tax returns with financial statements (T2125 for sole proprietorships or T2 for corporations) along with the corresponding CRA Notices of Assessment. The income used is generally the two-year average of net income. Tax deductions that reduce taxable income (dépréciation, business expenses) can penalize borrowing capacity, even if the business's actual cash flow is strong.

Rental, Investment, and Other Income Sources

Rental income: lenders typically accept between 50% and 80% of gross rental income from existing properties. A signed lease and rental income history are required. For a property being purchased as an income property, projected rental income may be used if supported by a rental value appraisal.
Dividend and investment income: eligible if recurring over at least two years, confirmed by tax returns and CRA Notices of Assessment.
Pension and retirement income: public pensions (QPP, OAS), employer pensions, and RRIF withdrawals are eligible upon presentation of T4A or T4RIF tax slips.
Alimony and support payments: eligible if documented by a court order or notarized agreement in Quebec, with a receipt history of at least 12 months.
Commission income: the two-year average is used, and commissions must represent a regular compensation component confirmed by the employer.

The Qualifying Rate (Stress Test) and Its Impact

Regardless of income type, all Canadian borrowers must qualify at OSFI's qualifying rate, which is the greater of the contractual rate plus 2% or the 5.25% floor rate. This qualifying rate reduces the maximum amount for which the borrower can qualify, as mortgage payments are calculated at a rate higher than the actual contract rate. This measure, imposed by Guideline B-20, is designed to ensure borrowers can absorb an interest rate increase at renewal.

Frequently Asked Questions

How do lenders calculate salaried income for a mortgage?

For a permanent full-time salaried employee, the lender uses the gross annual income confirmed by a recent employment letter and the two most recent pay stubs. Regular overtime, commissions, and bonuses may be included if the borrower can demonstrate a stable history of at least two years. The lender then calculates the GDS and TDS ratios to déterminé the maximum eligible loan amount.

How can a self-employed person qualify for a mortgage?

Self-employed borrowers must generally provide their two most recent CRA Notices of Assessment and corresponding T1 tax returns. The lender uses the average net income (line 15000) over two years. Some lenders offer 'stated income' or 'grossed-up income' programs for self-employed borrowers with a credit score of 680+ and a down payment of 10% or more, allowing them to use income higher than reported.

Does rental income count toward mortgage qualification?

Yes, but only partially. Most lenders accept between 50% and 80% of gross rental income for debt service ratio calculations. Some lenders add rental income to the borrower's income, while others offset it against expenses. Signed leases and rental history are required as supporting documentation.

Is dividend income eligible?

Yes, dividend income is eligible if it is recurring and documented through tax returns and CRA Notices of Assessment over at least two years. The lender will want to ensure this income is stable and predictable. Dividends from a corporation controlled by the borrower are treated as part of the self-employment income analysis.

Is probationary or temporary employment income accepted?

It depends on the lender. Some lenders accept income from a probationary employee if the employment letter confirms a permanent position after probation. Others require the probationary period to be completed. For temporary contracts, a two-year history in the same field with stable income may suffice with certain lenders.