Posted on July 30th, 2015
CMHC announced last week that it will increase how much income from a legal suite can be used to qualify for a mortgage from 50% to 100%, making things a little easier on those buying houses with the intention of renting a portion out. There are, of course some strings attached. From Canadian Mortgage Trends, here are some of the qualifiers for the new allowance which takes effect September 28th, 2015:
The property must be owner-occupied.
The property being insured can have only two units (i.e., a duplex or a single home with a legal secondary suite).
Rental income cannot be used if the suite is “illegal/non-conforming” but “legal non-conforming” is okay. (Non-conforming means that the suite was grandfathered in before zoning/regulations restricted such units. You can check with the city to confirm if a suite is legal.)
The suite must be self-contained with its own entrance.
Property taxes and heat must be factored into the borrower’s debt ratios (which is currently not the case when using rent from legal secondary suites).
For existing units, there must be two-year history of rental income from the suite. The maximum rental income allowed for qualification is a two-year average of the unit’s rent.
For new units, a market rent appraisal can be accepted if an appropriate vacancy rate has been applied to the estimated rental income.
Mortgage applicants must “demonstrate a strong history of managing credit” with a minimum credit score of 680.
So while this won’t help those who are renting out condos or houses that they themselves are not living in, it should make larger houses more affordable for families if they’re able to find one that comes with a suite.
As with any of these changes, it’s likely but not guaranteed that the other two insurers, Canada Guaranty and Genworth, will follow. Lenders themselves also may or may not match the policy. Currently most policies around using rent from a suite in an owner occupied property are more conservative than the new CMHC rule, with many lenders using a rental worksheet that accounts for the costs of maintaining the rental. With that approach, any surplus of rent over expenses is added to the applicant’s income, while a shortfall would be accounted for as a debt. Whether it’s better to use 100% of suite income or a rental worksheet depends on each individual situation, so this is where having a broker in your corner to figure out which lender has the most beneficial policies is essential.