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Few new parents realize that the timing and length of the period they take off work after a child’s birth can complicate their mortgage approval process.
When calculating how much mortgage applicants qualify to borrow, most lenders consider 100 per cent of the regular earnings of a parent who is on leave if they have a permanent job, proof of income and a letter from their employer stating they’ll be back at work on a date that is within 12 months of when the purchase of the new mortgage is funded.
But for those planning to return more than a year after the start of the mortgage, some financial institutions will only consider a fraction of their employment income, according to several independent mortgage brokers.
It’s something expectant parents may have to take into account when deciding whether to opt for a standard leave of 12 months or an extended one of 18 months if they are buying a home, experts say. The federal government introduced the option for parents to spread Employment Insurance parental benefits over 18 months in 2017.
Families can face the same issue if they refinancing their mortgage or if they are switching lenders at renewal and had purchased their home with a down payment of at least 20 per cent, which requires re-qualifying for the new mortgage.
“Most lenders use 100 per cent within 12 months, and then some go down to as low as 60 per cent if you’re doing the 18-month leave,” said Richelle Morgan, a mortgage agent at Kingston Mortgage Solutions in Kingston, Ont.
At mortgage brokerage Tribe Financial Group in Toronto, co-founder and chief executive officer Frances Hinojosa also said she sees many lenders using 60 per cent of a parent’s employment income if the leave is set to extend beyond a year from the start of the mortgage.
And at Perch, a Toronto-based digital mortgage brokerage, founder and CEO Alex Leduc said several lenders won’t consider employment income at all if an applicant is set to return to work later than 12 months after the home purchase closes.
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Using only a portion of a mortgage applicant’s pay – or excluding one parent’s income from consideration in a dual-earner household – can significantly reduce the maximum amount a family is allowed to borrow.
The practice of treating longer leave periods differently has been common since the 18-month option was introduced, according to several mortgage brokers. But it remains little-known outside the industry.
It’s an issue that Ms. Morgan says she periodically has to help young expectant couples to navigate.
In the most recent such case Ms. Morgan handled, she said a mother of one, who was pregnant with her second child and had a due date just before when the new mortgage would kick in, opted against taking extended leave.
“I think that partially came down to other factors,” Ms. Morgan said. “But we did have to have that discussion – whether or not the 18 months would be a fit for her mortgage-wise.”
Among the Big Six banks, Royal Bank of Canada RY-T, Toronto-Dominion Bank TD-T and Bank of Montreal BMO-T consider 100 per cent of an applicant’s employment and don’t distinguish between a 12-month or an 18-month leave, according to spokespeople at the three institutions.
Bank of Nova Scotia BNS-T and Canadian Imperial Bank of Commerce CM-T said they evaluate each client’s situation individually.
National Bank of Canada NA-T considers the date of birth of the child in its qualification process, according to spokesperson Matthieu Charest. If the closing date – when the purchase of the house if finalized – is within 12 months of the birth, the bank uses 100 per cent of the income in its calculations. If the closing occurs more than 12 months after, the bank considers 60 per cent of the income, he said in an e-mail, adding that the bank regularly reviews its practices.
Desjardins also said it evaluates candidates on a case-by-case basis.
First National Financial and MCAP, two of the country’s largest non-bank mortgage lenders, did not respond to a request for information about their policies on parental leave.
Mr. Leduc said some lenders don’t have written policies or guidelines that explicitly distinguish between a 12-month or 18-month leave. In practice, though, they’re unlikely to allow 100 per cent of an applicant’s income to be considered if the return date is more than a year after the closing, he added.
Lenders may be worried that parents who take leave for longer are less likely to return to work, he said.
“A lot more can change in that time. And then if you’re stuck with one less income, from an underwriting standpoint, then that puts your mortgage in a riskier position,” he said.
But Mr. Leduc is skeptical of such concerns. With a letter from an applicant’s employer stating their salary and expected return date, lenders should be comfortable that a parent will go back to their regular earnings regardless of the duration of their leave, he said.
“Candidly, it’s a bit silly.”
