Lending requirements about the purchase of rental properties are almost as varied as the number of lending institutions and is a topic of great discussion. I would definitely discuss your present circumstances and the kind of rental property you would like to buy with your mortgage broker.
If the suite is LEGAL some lenders will allow you to ‘offset’ the whole rental income from your mortgage payments. Other lenders will only add the rental income to your total income – so they are only using 32% of the rent to help you qualify.
If you are looking to buy a house for you to move into, and it contains an ILLEGAL basement apartment, some lenders will ‘offset’ a portion of the rent (e.g. 75%) to help you qualify to buy the property.
If you are considering buying separate rental property then there are generally two ways to consider whether you qualify.
- First – You own your present house and want to remain living in it plus you wish to purchase a rental property.
- Second – You own your present house, you want to rent it out and buy another house for you to move into.
With the first scenario, your excess income (after the mortgage on your house plus other liabilities are deducted) plus a portion (usually 50% to 70%) of the proposed income are used to calculate your maximum purchase price. This usually qualifies you for a smaller mortgage than the first scenario.
With the second scenario, you need to qualify for the new house under the ‘normal rules’ – the amount of equity available; GDS of 32% and TDS of 40% of your total income. If you currently have a mortgage on your existing home then the ‘proposed’ rental must cover those payments and expenses.
If you have less than 15% equity to invest in the rental property, you will need to insure it under CMHC.
Some of CMHC requirements are:
Loan to value may not exceed 85%
The underwriting fee for 1 to 4 units is $600 payable with application
insurance premiums are much higher than normal purchase premiums and are due when mortgage funds are advanced (premiums may be added to the mortgage loan)
- up to 65% 1.75
- up to 70% 2.00
- up to 75% 2.25
- up to 80% 3.50
- up to 85% 4.50
The borrower should have a net worth at least equal to 25% of the loan with a minimum of $100,000 though flexibility as to the minimum net worth can be applied.