Borrowing while on disability income: what lenders look at

What changes in this situation

What changes is the file, not the person. Disability income is usually a fixed amount set by someone else, paid on a schedule you do not control, and documented by a benefit statement or award letter rather than a pay stub. It may be taxable or not, reviewed periodically or granted without a review date, and it may be means-tested, meaning the benefit itself depends on your income and assets.

That shape affects three things a lender measures. The first is documentation. A benefit statement showing the amount and frequency has to stand in for employment income, and a lender will want to see the payment arrive rather than be described.

The second is the debt service ratio. Federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44%, and qualify an uninsured mortgage at the greater of the contract rate plus 2 percentage points and 5.25% under OSFI Guideline B-20. Insured mortgages and provincially regulated lenders are not all subject to B-20. A fixed income does not fail that test by itself, but there is no overtime, no seasonal bonus and no extra shift to absorb a shortfall, so the ratio has less room to move.

The third is duration. A loan payment runs to a date. If the benefit behind it is reviewed before that date, the payment has to come from somewhere else. Lenders think in terms of the documented duration of income, which is why a benefit with a review date is read differently from one granted without one.

One dependency is worth checking before you move any money. If your benefit is means-tested, drawing down savings, holding a large balance, or taking in rental income can affect the benefit itself. That is a question for the program administrator rather than a lender, and it is cheaper to ask before the loan than after.

What a lender can and cannot see

Canada has two national credit reporting bureaus, Equifax Canada and TransUnion Canada, and a free copy of your credit report is available from each. Reading both before you apply is the simplest way to know what a lender is looking at.

What appears on a report: the accounts in your name, their balances and limits, your payment history, any collections, and insolvency records. A consumer proposal stays on a credit report for 3 years after completion, or 6 years from filing, whichever comes first. A first bankruptcy stays on a credit report for 6 years after discharge.

What does not appear: your bank balance, the source of the deposits into your account, your medical information, or any disability designation. A lender does not learn from a credit report that your income is disability income. It learns what you disclose and what you authorize it to verify. That is why the documents carry more weight than the label.

Insurance and loans sit in the same place. A private disability insurance policy is a contract between you and an insurer, and a lender does not see it unless you provide it. If the policy pays a regular benefit, that payment can be treated as income on an application, but the lender will read the terms to see how long the payment is documented to last and whether it is reassessed.

Supervision differs by product and by province. Lending in Canada is licensed provincially, so the regulator and the rules differ by province and territory. Consumer complaints about federally regulated financial institutions go to the Financial Consumer Agency of Canada; provinces license and supervise most other lenders. Above all of that sits the Criminal Code criminal rate of interest of 35% per year (s. 347). A cost of borrowing above that line is a criminal offence, not a pricing decision.

Routes that exist

• Unsecured personal loan from a provincially licensed lender. Nothing you own is pledged, so no asset is at risk if the payment slips. The trade-off is price: with no collateral, the lender's view of a fixed income shows up in the rate and in how much it is willing to advance.
• Secured borrowing against something you own. A vehicle or home equity can support a larger loan at a lower rate than an unsecured one. At federally regulated lenders, a home equity line of credit is generally limited to 65% of appraised property value, with total secured lending usually capped at 80%. The trade-off is that the asset stands behind the debt, and appraisals and registration add cost and time.
• An open loan. An open loan can be repaid in part or in full at any time without a prepayment charge, which is why it is often chosen by people waiting on a decision that may bring a lump sum, such as a retroactive benefit or a settlement. The trade-off is that open terms are usually priced above comparable closed terms. If no lump sum is coming, a closed term usually costs less over the same period.
• A credit union or other local lender operating under provincial rules. Some weigh a member relationship and documents that other lenders set aside, and not all are subject to the same federal mortgage guidelines. The trade-off is a smaller footprint, membership conditions, and pricing that varies more from one institution to the next.
• A secured credit card or a small revolving line. This is a rebuilding route rather than a borrowing route. The trade-off is a high cost of carrying a balance and a limit too small to solve a large need.
• An insolvency route: consumer proposal or bankruptcy. Only a licensed insolvency trustee can administer either, and trustees are regulated by the Office of the Superintendent of Bankruptcy Canada. The trade-off is real. These resolve a debt load that cannot be managed on the income, but they stay on the credit report for years and change what is available afterward.

loanmoose.ca is not a lender and does not make credit decisions. It matches and compares; the lender you are matched with decides whether to lend, on what terms, and at what price.

What to have ready

1. The benefit award letter or statement showing the amount, how often it is paid, and whether a review or end date is attached.
2. Several months of bank statements showing those payments arriving, so the deposit history matches the statement.
3. Your credit reports from both national bureaus, which you can request free of charge from each, so you are reading the same file the lender will.
4. Photo identification and proof of address.
5. A written list of existing debts: balance, minimum payment and rate for each. This is what the ratio math runs on.
6. Supporting documents for anything you are relying on: ownership papers for an asset you would pledge, the insurance policy and payment records if a policy benefit is part of the income, and discharge or completion documents if there is an insolvency in your past.

What not to do

• Do not take on a payment that outlives the income behind it. If a review date arrives before the loan ends, the remaining payments have to be covered by something that is not yet in place.
• Do not reach for a payday-style product without pricing it. Where a province licenses payday lending, the federal Payday Lending Regulations cap the cost of borrowing at $14 per $100 advanced, and some provinces set a cap lower than that, in which case the lower cap applies. Quebec does not license payday lending, which effectively prohibits the model there. A payday loan is generally up to $1,500 for a term of 62 days or less, and the cost of borrowing is far higher than a conventional loan when measured across a year.
• Do not pay a fee upfront in exchange for a promise of a loan. Legitimate costs are disclosed and taken from the proceeds. Money demanded before funding, particularly under time pressure, is a reason to stop.
• Do not inflate the income, and do not fire applications at several lenders in the same week without understanding what each inquiry does to your file. A mismatch between what you write and what the deposits show is what turns an application into a decline.

The right answer depends on your province, your benefit program and the lender's own policy. Nothing here is financial, legal or tax advice; it is a description of how the pieces fit together.