If you’re thinking about switching jobs, keep reading!
When it comes to getting approved for a mortgage, lenders will assess how much you qualify for based on your qualifying income. (read more about how qualifying income is calculated in this article. It’s common for employees to have a base salary and additional compensation such as bonuses or overtime that they can use towards their qualifying income. You can only use that additional compensation towards qualifying if you have a long enough history earning it with your current employer. If you were to switch jobs, it may affect how much you qualify for and it’s better that you assess if you should accelerate your purchase prior to switching jobs or live with delaying your purchase or mortgage switch up to 3 years. We explain how this works in the scenario below:
Quinn has been working at the same company for 4 years as a Sales Representative and has a base salary of $60,000. She also is eligible for bonuses if she meets her sales targets. In 2018 and 2019 she received $40,000 in bonuses each year. If she remains at the same company, her qualifying income would be $100,000.
Being the all-star that she is, Quinn was approached by a recruiter for a job as a Sales Manager, where she has the opportunity to make up to a 100% bonus if she hits her targets. She also gets a base salary increase to $70,000. Quinn is confident in her ability to meet her targets and is excited by the opportunity to potentially earn up to $140,000 per year! However, if Quinn took this job, her qualifying income would drop from $100,000 to $70,000.
Assuming Quinn had saved $50,000 as downpayment towards a home, this would mean her maximum purchase price drops from $523,101 to $375,296. That’s a 28% reduction in how much she can qualify for!
After you switch jobs and get past probation (typically 3-6 months), the lender will consider your full base salary. Assuming you left for higher pay, the amount you qualify for would increase. However, the additional compensation (bonus, overtime, etc) you could earn in your new role would not be eligible for at least 2 years.
Your two most current T4’s or year end pay stubs would need to reflect your full base salary and any additional income. If you switched jobs in September of 2020 and your new company paid a bonus at the end of each year, you wouldn’t be able to use that bonus as qualifying income until at least December 2022.
The year a bonus is paid is extremely important. A common scenario is an employer that declares bonuses at year end, but doesn’t pay them out until the following year (typically February or March before the RRSP deadlines). In this case, you wouldn’t be able to use it until December 2023.
The reason for such a long lag in being able to use the additional compensation as qualifying income is that it must be considered in the calendar year it’s paid. Since most people don’t start a new job on exactly January 1st, that means you wouldn’t have a full year of income until the following calendar year from when you started.
If the impact is negative (since the higher base salary could offset the loss of additional compensation) and it blocks you from being able to qualify for the home you wanted or from switching lenders, you need to consider either committing earlier than you originally planned or accepting a delay up to 3 years. Switching lenders is fairly straightforward since you typically would switch for a lower rate, but rushing a new purchase can be risky.
Most people find that after they close a purchase, there isn’t a lot of money left laying around. If you’re considering switching jobs before purchasing a new home, ask yourself this question: If this new job opportunity didn’t go as planned and I was unemployed within 3 months, would I have the financial capacity to find a new job without missing my mortgage payments?
Every situation is different, so you should consult with your mortgage professional to assess what the impact to your qualifying amount would be from switching jobs.