CMHC to Allow 100% of Suite Income

The market for houses with basement apartments may get a little hotter. CMHC has announced it will allow 100% of the rental income from legal secondary suites to be used when qualifying for a mortgage. Currently it allows 50%.

The nation’s largest default insurer says the move is meant to “facilitate affordable housing choices for Canadians.”

Secondary rental suites are recognized as a source of affordable housing offered at a cost that is often lower than those for apartments in purpose built rental buildings,” it adds. Secondary/basement suites also give lower-income Canadians the chance to live in single-family residential neighbourhoods.

The new rule takes effect September 28, 2015.

“This is definitely good news for anyone who is looking to buy a home and subsidize the cost” with a renter, says Vancouver-based broker Peter Kinch, of DLC’s Peter Kinch Mortgage Team. “…The ability to utilize 100% of the rental income to qualify for the mortgage…can certainly make the difference for many homeowners and may move a larger number of homebuyers from condo purchases to a single-family home with a mortgage helper.”

Broker Marg Green, of Concierge Mortgage Group, agrees that “there will be a big demand for it,” but rightly notes that more clarity is needed on what CMHC considers a legal suite. “What is legal? Is it fire retrofitted? Is it registered with the city? If the suite isn’t legal, lenders generally won’t use the rental income (for qualification purposes).”

Here’s what we’ve gathered thus far, with respect to what’s required to use 100% of suite income with CMHC:

  • The property must be owner-occupied.
  • The property being insured can have only two units (i.e., a duplex or a single home with a legal secondary suite). 
  • Rental income cannot be used if the suite is “illegal/non-conforming” but “legal non-conforming” is okay. (Non-conforming means that the suite was grandfathered in before zoning/regulations restricted such units. You can check with the city to confirm if a suite is legal.)
  • The suite must be self-contained with its own entrance.
  • Property taxes and heat must be factored into the borrower’s debt ratios (which is currently not the case when using rent from legal secondary suites).UPDATE: After running this story, CMHC says it made a typo and that borrowers can in fact exclude property taxes and heat under the new policy. See this story.
  • For existing units, there must be two-year history of rental income from the suite. The maximum rental income allowed for qualification is a two-year average of the unit’s rent.
  • For new units, a market rent appraisal can be accepted if an appropriate vacancy rate has been applied to the estimated rental income.
  • Mortgage applicants must “demonstrate a strong history of managing credit” with a minimum credit score of 680.

 

On 3-4 unit owner-occupied properties and 1-4 unit non-owner occupied rentals, CMHC will be allowing a net rents calculation (i.e., gross rents less operating expenses).

Note that individual lender guidelines may very well be tighter than what you see above.

Genworth and Canada Guaranty have had a 100% add-back policy for a while (for basement suites), but mainly in Victoria and Vancouver. CMHC’s new policy extends nationwide. Both private insurers say they’re reviewing CMHC’s changes and haven’t decided if they’ll match this guideline.

“In the big picture, I do not see that this will have a significant impact on the overall housing market,” says Kinch. “But in certain suburban areas, this shift in CMHC policy will help speed up a trend that is already taking place, and that is the widening price-gap between single-family and multi-family (condo, townhome) homes.”

Another broker, who didn’t want to be named, said the move could encourage more people to lie about owner-occupying a property (i.e., say they’re living in one unit but renting out both units). That minor unavoidable side effect aside, CMHC deserves applause for trying to boost the stock of affordable rentals and allowing young homebuyers an alternative to condo living.

  1. this is great news. I have two questions. I currently own a town house just outside Toronto but plan on buying something in the city next.

    1. Does this apply to people with less than 20% down?

    2. When considering rental income is it as simple as saying $1000 (rent) x 12 months and adding that to your annual income? Or do they look at it like “the mortgage will cost 3500 a month but we will subtract 1000 a month so the borrower must be able to afford 2500 a month.

    If clarity is needed on my question please let me know!

    1. Hi Brandon,

      1) Yes, up to 95% loan-to-value

      2) For properties that include an existing secondary suite, CMHC requires lenders to use an amount not exceeding the average rent for the past 2 years. This amount is added to the borrower’s income (i.e. added to the denominator of the debt ratio calculation)

      1. 2) This is not correct. You can verify with lease agreements and economic rent letters as well depending on the lender and what excuse you use for it not showing on the tax returns.

        1. Hi Cory,

          I assure you this is quite correct as it’s taken directly from CMHC’s new guidelines.

          Note that my answer referenced the 100% add-back policy on existing secondary suites, not new suites. The 2-year average rent calculation is required in such cases.

          CMHC states that where the secondary suite has not yet been rented for 2 years or where leases are only available for a shorter period, only a 50% add-back may be used.

          For new units with no rental history, the amount of rent may be confirmed with a market rent letter (with a vacancy deduction) as noted in the story.

  2. Be interesting to see if they’ll use rental income from Family members (ie. Parents downsizing their current home to move in with their children OR college aged children using the legal suite while going to school).

    Rob, you hear anything on this yet?

    Thanks!

    1. Hey Ryan, To the best of my knowledge, CMHC doesn’t have a policy prohibiting rental income from a family member as long as it’s legitimate and well documented (i.e., the income is reported on the homeowner’s tax return, the rent is deposited in the homeowner’s bank account, etc.) Lender policies are often a different story.

    2. In general lenders do not want to use income from family members or students unless the client is paying taxes on that income for 2+ years.

  3. If you cant afford the mortgage without your 20% down and income sweet assistance, you shouldnt be buying the house. Theres enough house poor, jokes around with eyesore unfinished yards and fences. These people will be going for even bigger homes, and then be up $#!@ creek if they cant find any renters for a few months. lol

    1. If you don’t know the difference between sweet and suite you shouldn’t be buying a house…I would say that if you have 5% down in addition to closing costs and land transfer taxes you are doing okay.

  4. It’s amazing that CMHC would do such a move and continue to support a real estate bubble that they will not take responsibility for the crash it will enhance.

  5. The buyers are taking big risks as lenders tend to drag people into debt that they can’t afford. And the real estate industry keeps making more revenue as they hype the market and push prices up.

  6. This change will have very little effect on the market; especially purchases. As mentioned in one of the comments above, the property being purchased must have a unit with 2 year rental income history in order to use 100% of the rental income. Otherwise you can only use 50%. This is just a small tweak to the existing rental Program.

  7. Rob’s analysis of the details is very helpful to brokers as always. By reading some of the comments it is once again clear that sometimes the point of these policy changes is completely missed.

    There has been a growing policy movement on all levels of government particularly municipal and regional governments to increase the density of population in urban housing stock. Two people shuffling around a 2600 sq. ft. two story by themselves is bad urban planning. Encouraging a basement suite in that 2600 sq. ft. home is good urban planning. I think this is just the case of a crown corporation encouraging good urban policy.

  8. Great article Robert. You’ve outlined the CMHC requirements very clearly. I wonder what the financing rules are if it is an existing unit but illegal and the owner is willing to bring it up to code. Is that considered as new?

    Legality of second suites is something I’ve really been involved with in the past several years. I actually put together an online resource for homeowners who want to do legal basement suites (suiteadditions.com) in case your readers are interested in some of the technical side of it.

    Thank you again for your detailed article.

  9. Will CMHC forward information on mortgagees to CRA to ensure homeowners are paying proper amount of tax on this revenue?

    1. anyone with a good accountant will be able to defer the taxes by depreciation. then eliminate any capital gain by claiming it as a principal residence. we all know if you live in a house for a year their is no capital gains tax. then there is the capital gains tax exemption.

      1. @ kevin: The one year rule is a long-standing myth.

        There is in fact no time limit on how long you must live in the home. You simply have to convince the CRA (if they dispute it) that it was your principal residence. Lots of people move within a year of buying a home as a principal residence for various and perfectly legitimate reasons (lay-off, divorce, job transfer, intolerable neighbours, etc.).

        1. Just to be on the safe side we should all make it clear to the public that “pretending” a non-owner occupied property is your principal residence is illegal and those who attempt to do it are constantly being caught by CRA and subject to huge penalties and interest. I do not think it is wise to try to “convince” CRA of anything. It just better be true.

      2. As soon as you take depreciation (CCA), part, or all of your home will no longer qualify for the principal residence exemption. Not to mention houses don’t often depreciate in value, so when you do eventually sell the residence, any CCA taken will have to be included back in income. This can lead to a substantial tax bill down the road, in order to save only a small amount of tax each year from net rental income.

  10. Wonderful news. I shared in all my social networking channels and shared it with my clients. This is a great opportunity for first time buyers and lower income families. Thank you for sharing this.
    Axel
    Macdonald Realty Ltd
    Victoria, BC

  11. People will look back on rule changes like this one as another in a long list of mistaken policy moves that caused the bubble and crash that is going to come. This rule changed has caused those who would not have otherwise qualified for a big mortgage to now qualify. This has led to further price increases in housing prices. Mortgage brokers who are paid on commission i have been told are skewing this rule by advising people who do not qualify due to income to report rental income on the 2nd bedroom in condo’s for example or any house that has a basement. This is widespread now. The brokers do it to make the commission and the prospective home buyer complies since there is no other way they can get into an even more overpriced market than when this rule change came into existence.

    1. S Walker

      What on earth are you talking about?

      The rental income must be from a legal secondary suite. A 2nd bedroom in a condo is not a legal suite!

      No way are brokers doing this and no way is this widespread.

      You are spreading ridiculous hearsay.

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