Yes, rental income may help you qualify, but the amount a lender recognizes needs to be checked before you build your purchase budget around it. If the home only feels affordable when every dollar of expected rent is counted, have that conversation early.
There are two calculations to work through: the lender’s qualification calculation and your household’s ability to carry the property. A mortgage approval does not tell you how comfortable you will feel during a vacancy or an unexpected repair.
How does the lender count the rent?
CMHC publishes different rental-income approaches based on occupancy, unit count and whether the property is the subject of the insurance application. For example, its guidance allows an up-to-100% gross-rent approach for an owner-occupied two-unit property that is the subject of the application. Other configurations may use up to 50% of gross rent or a net-income approach. These are CMHC criteria, not a universal promise from every lender. Source: CMHC rental-income guidance.
“Gross” means before expenses. In an income-addition calculation, the accepted portion is added to qualifying income. A net approach considers expenses. If someone describes the method as a “rental offset,” ask them to show precisely which costs are offset and how any shortfall is treated; do not assume that word means the same calculation everywhere.
What $2,000 of rent might mean
Here is a simplified illustration, not a lender offer. Assume an applicable calculation recognizes 50% of $2,000 in monthly gross rent:
- Expected monthly rent: $2,000.
- Portion recognized in this illustration: $1,000 monthly, or $12,000 annually.
- What it does not establish: an extra $1,000 of permitted mortgage payments.
The accepted rent is only an input. The rest of the application still needs to be assessed. Ask your broker to show the result with the property’s actual figures rather than applying this illustration to your maximum purchase price.
Now look at your own cash flow. At $2,000 a month, one empty month removes $2,000 of expected annual receipts before any repair bill. Could your budget absorb that? Test a vacancy scenario and set aside a repair reserve before deciding how much of the rent you want to rely on.
A finished basement is not enough information
Check the suite’s municipal status separately from the lender’s treatment of its income. In Mississauga, second units must meet building, fire and zoning requirements and be registered with the city. The city provides a registry and registration instructions. Source: City of Mississauga.
For a property in another municipality, check that municipality’s requirements. A listing description or an existing tenant does not replace that investigation. Ask your lawyer and the municipality about compliance, and ask the lender what property evidence it needs.
The questions to settle before making an offer
Tell your broker whether you will live in the property, how many units it has, whether tenants are already there, and how the proposed rent was established. Ask whether the lender needs a lease, an appraiser’s rent assessment, tax records or other supporting documents for this particular file.
If the purchase only works using an optimistic rent figure, compare a lower purchase price, a different property or more preparation time. Another financing route may have different costs and requirements; it needs a full comparison, not an assumption that rental income will solve the shortfall.
Have a property in mind? Contact Rajiv through SimplifyMortgage.ca to discuss which rental assumptions need checking before you rely on them. That link takes you to Rajiv’s mortgage business website.