Your car payment is quietly shrinking your mortgage approval

When you apply for a mortgage, the lender does not just look at the house. It adds up everything you owe each month and tests it against two ratios.

The first is GDS, gross debt service: your housing costs alone, capped at about 39% of gross income. Your car is not in that one.

The second is TDS, total debt service: housing plus every other debt payment you carry, capped at about 44%. Your car is very much in that one, and it is usually the largest thing in it.

These are CMHC guidelines rather than absolute rules, and individual lenders flex them. But they are the shape of every conversation you will have at a bank, and the arithmetic is not negotiable.

The car counts at full weight

This is the part that surprises people who assume a car loan is somehow lighter than other debt because there is an asset behind it.

Car loans and leases are counted at the full monthly payment. There is no discount because the loan has eighteen months left. There is no credit for the car being worth $20,000. There is no allowance for the fact that you could sell it. The payment is the payment, and it sits inside the cap at face value until the loan is gone.

Which means the real conversion is simple. Room under the cap turns into mortgage principal through ordinary annuity arithmetic. Take room away, and the principal shrinks with it.

Be careful with that bottom line and we would rather say so than let it read as a promise. The qualifying rate and the amortization period behind it are modelled rather than sourced, they are listed with low confidence on our assumptions page, and a real approval depends on your down payment, your housing costs, your credit and the lender in front of you. Treat it as the size of the trade, not as a number to take to a realtor.

What to do if you are buying both

A lot of people are shopping for a car and a house in the same year, usually in that order, and usually without knowing the first purchase prices the second.

Order matters more than anything else here. A car loan taken three months before a mortgage application sits in your TDS at full weight on the day the bank looks. The same car bought a year after you close costs you nothing at the approval.

• If the mortgage is the priority, delay the car, or shrink it. A smaller payment now is a bigger approval later, and the exchange rate between them is worse than most people guess.
• If the car is genuinely the priority, that is a fine answer. A long commute, an unreliable current car, a job that needs one. Just make the trade knowingly rather than discovering it at the bank.
• If you already have the car loan, paying it off before you apply removes the payment from your TDS entirely. Whether that beats keeping the cash for a larger down payment depends on the numbers, and it is exactly the question to put to a mortgage broker.

None of this means do not buy the car

It means the real price of a bigger car is sometimes a smaller house. That is a legitimate trade, and plenty of people should make it. A car you rely on daily against a house you might buy in three years is not an obvious call in either direction.

What it should not be is a surprise. Run your own numbers before you sign anything, and you will at least know what the trade costs.