The cost of purchasing a house in Canada seems to be constantly on the rise with the average price of a single family detached home now at $519,521 (Global Property Guide Canada, 2017). First time home buyers are the consumers who are most often affected by the rising cost of housing, which means that these buyers have to look for alternative strategies to help them enter the real estate market. One strategy is to consider buying a property with the intention of renting out an area of the house to tenants. This rental income may be used to help the potential homeowner qualify for the mortgage or to offset the mortgage payment, hence why the secondary suite or rental suite is often referred to as a mortgage helper.
If the space is a self-contained suite, the borrower may be able to use a portion of the rental income for mortgage qualification. Although Canadian Mortgage and Housing Corporation (CMHC) will consider 100 per cent of the rental income on an insured mortgage application, most lenders will only allow a percentage, typically 50 per cent, of the rental income to be added to the gross household income. For example, if an individual buys a property with 5 per cent down with a suite that rents for $1,200/month, then $600/month can be added to the total household income, which can help you qualify for the mortgage.
Rental income can also help offset your mortgage payment. If your home costs $519,521 the monthly mortgage payment will be $2,233, with five per cent down and a five year fixed term of 2.59 per cent on a 25 year amortization. So if you apply your entire rental income of $1,200/month to the mortgage payment, your monthly payment will drop to $1,033. The additional income covers 54 per cent or just over half of the mortgage payment each month.
For some homebuyers, it may be beneficial to consider adding an income suite to the property if it doesn’t have one. For example, if you only need to spend $25,000 to build the suite and you rent the suite out for $1,200 per month, the suite will pay for itself within two years. Once you have recovered the cost of the suite, you could then consider using the yearly rental income to make an annual prepayment towards your mortgage. Most lenders will allow an annual lump sum payment that is between 10 to 20 per cent of your original mortgage balance. Being a landlord isn’t for everyone, but if you do have the capacity for it, this can be an excellent source of extra revenue.
Of Prime interest is a collaboration of mortgage professionals. Trish Balaberde 250-470-8324, Darwyn Sloat 250-718-4117 Christine Hawkins 250-826-2001.