Heating Up Mortgage Qualification


No sooner than I wrote about Basic Mortgage Qualifications, the National Bank of Canada released an announcement to mortgage brokers outlining a new standard method for calculating heating costs and property taxes. Although at First Foundation we don't fund a lot of mortgages through the National Bank, I thought it would be interesting to outline these new policy changes as other lenders could adopt similar policies in the near future.

The National Bank released the following: "Effective April 15th 2013, The National Bank of Canada has established a standard calculation formula that must be used when the actual property tax and heating amounts cannot be confirmed."

Property Taxes

If a municipal tax assessment is not available for a property or the actual property tax amount cannot be confirmed, 1% of the property value (based on appraisal or purchase price, whichever is lower) will be used. For example, if you are purchasing a property for $400k, for GDS calculation, $4000/year would be used as the property tax component.

This is not really a significant change, we use 1% as a basic qualification guideline on preapprovals and from experience have found that most actual property tax amounts come in lower than this.

Heating Costs

Until these changes, it was pretty standard across the board to consider $100/month or $1200/year a reasonable cost to heat your home. However here is the new formula used by the National Bank:

$0.75/square foot of living space (not including the basement) divided by 12 months.

So if you are the soon to be proud owner of a 2200 square foot home, to figure out the heating costs to use on the mortgage application for qualification purposes, we would take the 2200 square feet and multiply if by $0.75 and then divide by 12 to come to $137/month. In the grand scheme of things, this is really not all that significant, however it might start a new practice (one that might not be all that bad).

Acceptable Documentation

To substantiate your property taxes, you can either provide a municipal tax statement, provide confirmation through your municipality website (if available), an appraisal from a certified residential appraiser or by way of the property's MLS Listing.

To prove the actual heating costs, you can provide an annual heating bill (paper statement or non modified electronic statement) including: name, address, account # and equalized amount. The National Bank also lists that it is accepatble to provide an "MLS Listing confirming annual or monthly heating costs".

New Practice?

In 6 years of writing mortgages in Saskatchewan, I have never seen an equalized heating amount listed on the MLS listing. However I wonder if this isn't all that bad of an idea. When buying a new home, especially your first home, it is good idea to know what your utility payments are going to be. By doing this you can make sure they fit within your budget.

Also, high equalized heating costs could actually tip you off to a problem with the house, perhaps the house is poorly insulated. This is certainly worth a conversation with your home inspector.

As I can't see REALTORS® listing the equalized heating cost on every MLS listing, when writing an offer on a property, you could consider adding it in as a condition to the purchase. Your REALTOR® will be able to work with you on this, however don't be surprised if they have never done this before, there is no question, this is out of the norm. However:

As buying a property is one of the biggest purchases you will make in your life, it might be a good idea to know exactly how much it will cost to live in - before buying it!

I am wearing a kilt right now. I have consumed coffee today. Family Man. Innovator. Follow me on Twitter @kiltedbroker | Formerly the Executive Editor of the First Foundation #OwnGrowProtect…

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