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As if the lack of sleep wasn’t enough, new parents looking to buy a home or renew their mortgage should brace for more paperwork and potential hurdles.
That’s because taking parental leave – 18 months is the maximum for combined maternity and parental leave in Canada – lowers your income. Even though it’s temporary, it can drastically reduce the amount of mortgage you qualify for.
The key to preventing this is to get an official return-to-work letter from your employer that definitively states the date you’ll be back at work and the salary you’ll be earning. With this in hand – along with a T4 or end-of-year paystub – your lender shouldn’t have an issue using 100 per cent of your income in your mortgage qualification.
If you’re taking a 12-month parental leave, this is usually pretty cut-and-dry – but your mortgage deal can go sideways if you’re taking more than 12 months. In some cases, lenders may only use a portion of your income – as low as 60 per cent – which will certainly affect the size of your mortgage loan.
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There are a few potential reasons why. Anecdotally, according to the customer service agents at Ratehub’s own brokerage, parents taking up to 18 months seem to have a harder time nailing down a specific return-to-work date and are less likely to have this crucial employer letter in hand, which complicates their application from the get-go.
Things can also get tricky if you earn what’s considered “variable” income – for example, making commission on top of a salary base. As your employer can’t assume what you would have theoretically earned during your leave time frame, your return-to-work letter will typically just reflect that lower base amount. The longer you’re away from your job, the larger the gap in those earnings.
Ultimately, though, there’s no universal rule or regulation that spells out how lenders treat mat leave – and some have policies that haven’t kept up with the times. Even though an 18-month leave has been the legal maximum in Canada since 2017, parents taking off that amount of time may be considered higher risk, falling under the assumption that they’re less likely to return to work and resume earning their full income.
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This is despite there being no publicly available statistics that show parents are less likely to return to work after a longer break. In fact, a 2023 Statistics Canada study found that mothers are becoming more likely to return to work after any length of leave, increasing to 88.4 per cent by 2019 from 82.3 per cent in 2009.
It’s maddening that parents are stuck with the burden of proof, despite what’s spelled out in federal law – and it’s important to confirm your lender’s policy on this, before putting in a mortgage application.
Of course, not every parent has a full-time, salaried job before taking leave – and there are special considerations here, too. Those who don’t have guaranteed working hours and set pay – such as part-time workers or freelancers – still need to provide proof of income. Lender requirements in these instances aren’t always the same.
For example, in an e-mailed statement provided to The Globe and Mail by Bank of Montreal, this type of income is assessed using the “lesser of the most recent year’s income or a two‑year average, supported by documentation such as T4s, personal tax returns, and notices of assessment.” CanWise Financial (the mortgage brokerage owned by Ratehub) has the same policy.
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Royal Bank of Canada, meanwhile, stated that, “Any requests of this nature would be assessed case by case and dependent on strength of overall application.”
Other parents may choose not to return to the work force after having their baby, meaning the family will need to qualify for a mortgage on a single income. This is not impossible, but it’s a change that your lender or broker should know about, especially if you’ve already taken out a mortgage on two incomes and need to renew your term.
The bottom line here is while you’re decorating the nursery and putting in a car seat, make sure mortgage planning – such as confirming your lender’s parent leave policy – is on your to-do list. It’ll be one less thing to keep you up at night.
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Penelope Graham is the head of content at Ratehub.ca
