As it turns out, there was a little typo in CMHC’s recent rental policy announcement.
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.
Great eyes CMT team! I thought that seemed weird at the time, but didn’t run the numbers to correlate what I thought vs. what is reality. Good on you for checking this out more thoroughly and for following up with CMHC.
Thanks!
-RS
I’m confused. I assumed PITH of own/occ subject always part of GDS when buying with a legal suite. Policy change just meant rental income went from 50% add-back to 100% add-back, which was good. The article / policy sounds to me like now we can drop the TH from ratios if property bought with suite?? What am I missing?
Hi Chris, under the new policy and current policy, taxes and heat do not need to be included in the GDS or TDS on an owner-occupied subject property with rental income from a legal secondary unit.
Cheers,
Steve Huebl
So on an owner occupied property with 1to 4 rental income unit(s) the borrower can use all of the income from the rental units but does not have to include payment of taxes & heat ( not insignificant expenses) when calculating GDS/TDS???
Does not seem rational.
A buyer of a single family residence must include PITH in their ratios but the buyer of the same, say bungalow with a basement apartment, does not have TH included?
With that fuzzy logic I understand why Genworth & Guaranty Canada are staying on the side lines.
It would be much costly to own a house nowadays unlike before. But well of course, the quality now is a lot better than the materials used way back then.