Can I Afford to Buy a Home With a Mortgage Helper?

Sara Lian
by Sara Lian July 23, 2016 / No Comments

Just when you thought you’d never be able to afford the spacious new home you’ve been eyeing, the new rules surrounding gross rental income and mortgage helpers were established. If you’re planning on renting out a secondary suite from your current home to a tenant, these rules will move you one step closer towards affording the home that you’ve been dreaming about.

Effective Sept. 28, 2015, the Canadian Mortgage and Housing Corporation (CMHC) increased the amount of rental income that can be used from secondary suites when qualifying for a mortgage. It says: “CMHC will consider up to 100% of gross rental income from a two-unit owner-occupied property that is the subject of a loan application submitted for insurance.”

Previously, you were only allowed to use just 50% of the gross rental income you earned from renting out a secondary suite. If you were renting out your basement for $9,600 a year ($800 a month) under the old rules, only half of that amount would be considered income on your mortgage application. The new rules allow the full $9,600 to be included. In this case, that’s an additional $4,800 that’ll go towards helping you get a bigger mortgage. And renting your basement just became that much more attractive. 

If you’re planning to purchase a property as a first-time homebuyer but you’re unsure about whether or not you’ll be approved for the mortgage you need, consider shopping around for homes that currently rent out basement units, in-law apartments, or garden suites. In order for the new CMHC rule to apply to your property, the unit rented out needs to be self-contained. This means that your tenant’s suite has to have its own entrance, kitchen, living, and sleeping areas that are separate from the rooms you’re using. The only parts of the property that can be shared are yards, parking spaces, laundry and storage rooms, and hallways.

Your mortgage application   

When filling in your mortgage application, the rental income you claim must be the same value as the income earned by the home’s current owners. Moreover, the rental income will only be considered if it’s been continuous for at least two years. If the rent has changed over the past two years, use the average amount. Finally, you’ll need a credit score of at least 680 for CMHC’s new rules to apply to you.

The calculation

Let’s assume that the average Canadian is earning $50,000 a year (before taxes). Let’s also say that this individual is currently earning $10,000 in rental income through a mortgage helper, thus earning a total of $60,000. If we apply the old CMHC rules, our mortgage affordability calculator tells us that with a $30,000 down payment, the maximum home price you can afford is $349,631 (this calculation is based on a 5-year fixed mortgage rate of 2.29% and an amortization period of 25 years). With the new CMHC rule, you can include the full amount of your rental income. This changes the maximum home price you can afford to $381,709. That’s an additional $32,708!

The risks and the rewards

By allowing homebuyers to include the full rental income from secondary suites in their mortgage applications, this will help many young families and first-time buyers get into the housing market.

However, taking out a larger mortgage will come with a great deal of responsibility. For those who have trouble with budgeting and overspending, a larger mortgage might also mean taking on greater financial risk. Not only will the principal amount increase, interest costs and land transfer taxes will also increase with more expensive homes. These payments may become especially difficult if your tenant moves out and you’re unable to find a replacement.

A mortgage helper could be the key to helping you realize your dream of home ownership. However, it’s always in your best interest to look over your budget before making a decision on whether or not you can afford to buy a home.

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Flickr: Joe Mabel