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A Better Add-Back

As it turns out, there was a little typo in CMHC’s recent rental policy announcement.Basement suite

In its original notice on July 24 (which CMT covered here), the insurer said property taxes and heat would have to be included in a customer’s debt ratios when applying for a mortgage on an owner-occupied property with a rental suite.

But when we did the math shortly after running that story, the numbers didn’t make sense. The new policy actually made it harder to qualify than the current policy, which isn’t too logical for a measure meant to spur secondary suite formation.

“This was a mistake and…not the intent” of the agency’s original announcement, said Pascale Harvey, Manager, Homeowner Policy at CMHC.

Harvey says the new policy, which takes effect September 28, 2015, “creates increased affordability on the debt ratios.” That “allows for the creation of additional rental units,” which “many municipalities have moved towards recognizing as a need.”

“We always want to facilitate a range of housing options…including rentals,” she adds.

Unlike the policy that was originally announced, this clarification actually makes a significant difference in one’s ability to qualify. Take a hypothetical borrower buying the average Canadian home with 5% down, $70,000 in household income, no debt and a $1,000-a-month renter. By excluding property taxes and heat, that borrower’s debt ratios drop and that, in turn, helps them qualify for a property that’s 7-8% more expensive.

The new policy, as amended, should encourage a meaningful number of homebuyers to seek out legal secondary suites when house hunting.

Sidebar: Interestingly, Genworth Canada and Canada Guaranty have yet to match CMHC’s new nationwide 100% rental add-back policy on 2-unit properties.