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

Just when you thought your dream of having a spacious new abode is vanishing into the mist of ‘can I afford’ factor, new rules and regulations were framed around mortgage helpers and gross rental income.

If you’re thinking about renting a side-portion suite from your existing house to a tenant, these established regulations will help your cause to a great deal, making it one touch more comfortable for you to afford the home you’ve been longing for since perhaps ages.

The Canadian Mortgage and Housing Corporation (CMHC) has; with effect from September 25, 2015, raised the bar on gross amount of rental earnings that can be utilized from secondary suites while applying for mortgage. It states, “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.”

Earlier, you were permitted to use just 50% of gross rental earnings received from a tenant for your secondary suite.

For instance, if you rented out your secondary suite for $8,400 ($700 a month) under previous regulations, you could use just half (50%) of the gross rental income while qualifying for a mortgage.

The new regulations permit the complete $8,400 to be used for mortgage application. In such events, that is an extra $4,200 that will help you grab a bigger mortgage. And as a thumb rule, renting your secondary suite just gets that more pleasant for you.

If you’re looking to buy a property as a ‘first-time buyer’ but you are not sure if you will qualify for the mortgage you require, it’s a good bet you shop around for houses that are renting out in-law apartments, basement areas, or garden suites.

The portion of property you’re willing to rent out must be self-contained for it to qualify for the new CMHC rule. This clearly means that the unit you rent out to a tenant must have its separate kitchen, sleeping, living, and entrance areas. Only laundry, parking, yard, hallways and storage units of the property can be shared in common by the landlord and the tenant.

Your mortgage application
When filling up your mortgage application, ensure the rental income you claim is the same value as the earnings made by the current owners of the house. Also, the rental income has to be continuous for a minimum of two years for it to be considered. Exhibit the average amount in case the rent has changed over the course of last two years. For CMHC’s new regulations to apply on you, a credit score of minimum 680 is required.

The calculation
Let’s take $50,000 as the annual income of an average Canadian (before taxes). Let’s also assume that the person is earning a rental income of $10,000 through a mortgage helper, thereby earning $60,000 in gross. Applying old CMHC regulations, mortgage affordability calculator says that you can afford a maximum home cost of $349, 631, with a down payment of $30,000 (this calculation is for an amortization phase of 25 years with a fixed 5-year mortgage rate of 2.29%). However, with the new CMHC rule now in effect, you can use entire amount of rental income you earn. This alters your maximum home price affordability to $381,709. That’s an extra $32,708!

The risks and the rewards
This new mortgage affordability rule will help numerous first-time buyers and young families jump on the bandwagon of housing market.

But then, there’s no second thought to the fact that larger the mortgage, higher becomes your responsibility. Larger mortgage, make no mistake, can inspire big financial risk, especially for those who tend to overspend or have issues with budgeting.

Going for an expensive home means bigger land transfer taxes, higher interest costs and massive principal amount (of course).

And in case your tenant moves out and you fail to find a replacement, these payments may well make you sweat bullets.

A mortgage helper can surely come handy in helping you decide things better but, by the end of any day, it is you who has to take the final decision.

Going for larger mortgage is a decision you need to take with utmost sense of responsibility and best laid plans. Think well.