As the price of property in Canada has continued to rise, many home buyers have turned to purchasing a house with a rental suite to help with mortgage payments. Over the past few years, we’ve worked with many folks who were only able to qualify for a mortgage if they had rental income to supplement their household earnings. But if you’re planning on your tenant completely taking care of your mortgage payments, is that really the case?
In a tight rental market such as we’re currently seeing in Victoria, monthly rent can easily be just as much, if not more than, a monthly mortgage payment. However, it’s rare to count 100% of that amount on your application. An owner-occupied house with a legal, conforming suite is the most common situation, so it’s what we’ll consider here.
Most mortgage lenders understand that it’s difficult to come up with a tenancy agreement before you own a property; however, if you are going to be keeping the existing tenants and that agreement is spelled out in your real estate contract, they may use the current rental amount. More often, they will require the property appraisal to include the amount that the suite could rent for. In either case, it’s important to know that rent paid by a family member – parent, child, or sibling – will not be eligible as part of your application because of the regulations lenders are required to follow. Note that the rent we’re talking about is for the secondary suite, not the main portion of the house, except in very rare circumstances.
Once they’ve determined the amount of income that you will be receiving, each lender has slightly different criteria for applying it. If you are working with a bank or mortgage broker on your application, the first question you will want to ask is what percent of the rental amount they will use. In this case, higher is better! The second question you should ask is how they will treat that amount – as an add-back to your other income or an offset of your debts. It may seem like a small difference between a plus sign on one side of the balance sheet and a minus sign on the other, but it can mean a big deal when it comes to calculating your debt service ratios and ultimately determining whether or not you qualify for the mortgage you want. The Auxilium team will always sit down with you and review the scenarios where your deal will fit; when you meet with us, we’ll clearly point out the amount of add-back or offset in the calculations.
While you shouldn’t rely on rental income to completely pay your mortgage, a suite remains a good helper to get you into your dream home if you’re willing to take on the task of being a landlord. The Auxilium team keeps on top of changing lender guidelines to find the best fit for your situation. If you’re interested in buying a property with a rental suite, our experienced mortgage brokers will work with you to find a solution. Contact us for a free consultation with one of our underwriters: call 250-590-6520 (toll-free 1-855-590-6520) or visit us at 307 Goldstream Avenue during regular business hours. We can arrange an appointment evenings or weekends to work with you.