CMHC announces new rules to make it easier for homeowners to rent out property. Canada Mortgage and Housing Corp. announced changes Monday that will make it easier for homeowners to rent out their residences and qualify for a loan. Under the new rules, 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. The Crown corporation, which controls a majority of the mortgage default insurance market, says that starting Sept. 28 homeowners will able to count all the income from rental units when qualifying for a loan.
“Secondary rental suites are recognized as a source of affordable housing offered at a cost that is often lower than those for apartments in purpose built rental buildings,” the Crown Corporation said in a notice on its website.
Homeowners with less than a 20% downpayment and borrowing from a regulated financial institution must get government backed mortgage default insurance. Even financial institutions not regulated by Ottawa, like credit unions, must abide by CMHC rules to be covered by the government backing. Under the new rules, 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. The annual principal, interest, municipal tax and heat for the property including the secondary suite must be used when calculating the debt service ratios.
For three- to four-unit owner-occupied units and one- to four-unit non-owner occupied properties the net rental income (gross rents less operating expenses) can form part of the borrowers’ gross annual income. Rob McLister, the founder of ratespy.com, said previously homeowners could only count 50 per cent of the income from apartments being rented out to qualify for a loan.
“The impact will be on single residences,” said Rob McLister. “The properties with a mortgage-helper will be all the more desirable.” CMHC said when 100 per cent gross rental income is the income, or must have been sustained over at least two years and the income amount must not exceed the average of the past two years. This is to make sure it addresses income fluctuations, cyclical trends and deals with unexpected events such as vacancies.
The Crown corporation said in order to qualify, prospective borrowers will have to have strong credit history with a minimum credit score of 680.
“Revisions to homeowner policies in the areas of downpayment assistance, market value requirements, share of equity appreciation and monthly subsidy assistance will be made to align CMHC’s policies with the evolving financing needs of the affordable housing marketplace,” CMHC said.
This announcement comes at a critical point in time with hopes to in part drive increased investment in real estate by end users (as well as new or seasoned investors). The driving force of this is to technically help bolster the economy while continuing to keep housing affordability at reasonable levels. Permitting a 100% of rental income is significant for home owners (first time buyers) that have the ability to lease out a secondary unit. (A Secondary suite/unit is a private, self-contained unit within an existing dwelling. Secondary suites are also called second units, accessory apartments, granny flats, in-law suites and basement apartments (since many are found in basements). A secondary suite has its own bathroom, kitchen, living and sleeping areas but can share a number of features with the rest of the house. Shared facilities may include a yard, parking area, laundry and storage space, and sometimes a hallway. CMHC definition).
Secondary suites are an important supply of rental housing in many cities, towns and rural communities across Canada. For example, in 2014, it was estimated that there were about 26,600 secondary units in Vancouver, forming about a fifth of the rental stock. Rents in secondary suites are often lower than those for apartments in conventional rental buildings, and the suites can be developed with no or minimal government assistance. Secondary suites enable low- and moderate-income households to live in ground-related housing in a residential setting. A secondary suite lowers the monthly carrying costs for a homeowner and also reduces the required annual qualifying income for a mortgage. CMHC
(based on the Canadian average house price from the Canadian Real Estate Association)
(based on a 20% down payment)
|Monthly carrying costs|
|Required annual qualifying income for mortgage||$93,205|
|Additional monthly carrying costs|
|Total monthly carrying costs||$2,615|
|Rent for additional unit||$808|
|Net monthly carrying costs||$1,807|
|Net monthly financial benefit||$523|
|Required annual qualifying income for mortgage||$72,285|
|% change in affordability (before tax)||22.5%|
How can this work for you if you are buying a home with plans of taking advantage of this new rule?
Key Investor Strategy: For first time home buyers (or buyers in general) looking to purchase a home (Pre-Construction, New or Resale detached, semi & townhomes) always look for homes that have a finished apartment style basement with preferably a separate entrance (if there’s no separate entrance, its always good to at least have a finished basement). Apartment style, meaning that there are bedrooms, kitchen, washrooms sectioned off for their specific uses so at least you don’t have to build these units in at an added cost. When buying brand new or pre-construction, always make sure you are buying into a project whose secondary units have an apartment style floor plan considering the apartment style description given above. Having this already built in for you makes all this difference when it comes to investing and these also add enormous value to the home if or when it comes time to dispose of the property. (We always recommend a longer-term hold strategy for freehold properties). Having properties that fit this description is key to proving that the secondary unit either has been leased or has rental market value that is at par with going rental rates.
If you need more insight on how this benefits you and how to make this work for your unique situation, do not hesitate to contact Samuel C. Anyanwu. He is a seasoned realtor/investor/entrepreneur with great and creative real estate investment advise and analysis for investors and buyers alike.
Source: Financial Post.
Key Investor Analysis & Strategy by: Samuel C. Anyanwu. Realtor/CEO Starion Group Inc.