Understanding mortgage qualification metrics helps brokers guide clients effectively. One important factor lenders assess is the Loan-to-Income (LTI) ratio, which measures a borrower’s mortgage amount relative to their income. Understanding LTI can help brokers set realistic expectations and identify the right financing solutions for their clients.
What is Loan-to-Income (LTI)?
The Loan-to-Income (LTI) ratio is a financial metric that compares a borrower’s mortgage amount to their gross annual income. Lenders use it to evaluate risk and determine whether the loan amount is reasonable based on the borrower’s income.
How is LTI calculated?
LTI is calculated using a simple formula:
LTI Ratio = Mortgage Amount ÷ Qualifying Gross Annual Income
For example, if a borrower applies for a $500,000 mortgage and earns $100,000 per year, their LTI ratio would be:
$500,000 ÷ $100,000 = 5.0
This means the mortgage amount is five times the borrower’s annual income.
What is a good LTI?
A typical LTI falls between 3 to 4 times a client’s annual income. For example, a borrower earning $100,000 annually would generally qualify for a mortgage between $300,000 and $400,000.
Alternative lenders may accept higher LTI ratios, particularly when the borrower has strong credit, assets, or other compensating factors.
Why does LTI matter?
Lenders use LTI alongside other financial metrics to evaluate a borrower’s ability to repay their mortgage. A high LTI may suggest a borrower is taking on more debt than they can comfortably manage, which increases risk for the lender.
However, LTI is only one part of the assessment. Lenders also review credit history, existing debt obligations, and whether the borrower can pass the mortgage stress test.
LTI vs. GDS and TDS
While LTI measures the overall mortgage amount relative to income, lenders also use Gross Debt Service (GDS) and Total Debt Service (TDS) ratios to assess affordability.
- Gross Debt Service (GDS) measures the percentage of gross income spent on housing costs, including mortgage payments, property taxes, heating, and condo fees. Alternative lenders may accept up to 50% GDS.
- Total Debt Service (TDS) includes all debt obligations such as credit cards, car loans, and personal loans in addition to housing costs. Alternative lenders typically accept up to 50% TDS.
- Loan-to-Income (LTI) focuses on the total mortgage amount relative to income, providing a broader view of borrowing risk.
In short, GDS and TDS focus on monthly affordability, while LTI looks at the overall loan size compared to income.
LTI limits and regulations
The Office of the Superintendent of Financial Institutions (OSFI) has introduced LTI limits for uninsured mortgage portfolios to help manage mortgage risk. These limits apply to a lender’s overall portfolio rather than individual borrowers but can still influence lending decisions and approvals.
Key takeaways for brokers
- LTI is an important metric used to assess borrower risk.
- LTI limits can influence lender policies and approvals.
- Regulatory guidelines help manage risk in the housing market.
- Educating clients on LTI helps set expectations and identify financing options.
By understanding LTI and how it fits within the mortgage qualification process, brokers can better guide clients and help them navigate their financing options with confidence.
To learn more about Bridgewater Bank and alternative lending, visit our broker website or contact one of our Alberta BDMs.
