How much of a mortgage do you qualify for? You went to your bank and they told you $xxx,xxx – are they right? Your dream house costs a bit more, so is there any way to get the extra funds? If the property has a rental suite, and you have a good mortgage broker on your side, the answer is likely “yes”.
We have all heard the term “mortgage helper”. In fact, 25 per cent of detached houses in BC contain a rental suite and this rises to almost 40 per cent in the Lower Mainland. In Vancouver alone there are 26,600 rental suites (out of about 47,000 detached homes), and this accounts for roughly 20 per cent of all the rental stock in the city. So how is the rental income helping people qualify for mortgages – and how could it be helping even more?
Let us first examine how you qualify for a mortgage. In an attempt to lessen the average Canadian’s household debt, the federal government has legislated the amount Canadians can spend on mortgages. By law you can use no more than 32 per cent of your income to pay your monthly mortgage payment, property tax, strata fees (if applicable) and home heating costs. If you have exceptional credit, and a good mortgage broker to negotiate on your behalf, some lenders will let you go as high as using 39 per cent of your income.
Most banks, the vast majority, will take 50 per cent of a property’s rental income and add it to your employment income. This means if you make, as a simple example, $50,000 a year, and the property’s rental brings in $1,000 a month (or $12,000 a year) in rental income, your bank will increase your annual income to $56,000. This increase does little to raise the amount of home you can afford.
Let me show you with some basic math:
- 32 per cent of your $50,000 annual salary, $16,000, is permitted to be used on your housing costs – so $1,333 a month to pay your mortgage, property tax and heating
- Assuming it costs $80 month to heat your home, and you pay property tax of $2,400 year or $200 a month, you are left with $1,053 to make mortgage payments each month
- At today’s rates, averaging 2.6-3 per cent, that will finance you approximately $222,000
- When the bank adds 50 per cent of your rental income, $6,000 a year, to your income, the amount you can finance goes up to $255,000. Not much extra.
Now examine the same scenario when your mortgage broker has found you a lender who is prepared to use an 80 per cent “rental offset” system. Your income remains at $50,000 a year, and 32 per cent of that is still $16,000 a year, $1,333 a month, to make your mortgage payment, pay your property tax and heat the home.
- Our $50,000 income still only allows us mortgage payments of $1,053 after heating and property taxes
- Lenders who use a rental offset system deduct the rental income, in our case 80 per cent of the $1,000 monthly rental income, or $800 a month, from the monthly mortgage payment
- Let’s say for example, to finance $300,000, at today’s interest rates, it would cost approximately $1,425 a month
- To finance $300,000 now only requires the ability to qualify for a $625 monthly mortgage payment – the $1,425 monthly payment minus our monthly rental offset of $800 a month
- Need more than that? To finance $400,000 would cost roughly $1,900 a month, but, once offset with rental income, the monthly payment to qualify for would be $1,100
- It would take approximately 33 per cent of your $50,000 annual income to satisfy the financing requirements for a $1,100 a month mortgage payment. This is a number that your mortgage broker will easily be able to negotiate if you have a good credit history.
By finding a lender who offers a rental offset strategy to recognizing rental income, you have gone from a $255,000 mortgage to $400,000 without earning a dime more. And remember that I have just used basic figures to illustrate my point – you should be able apply the same increase to your mortgage qualification whatever the numbers that you are looking at. Go to a qualified mortgage broker and they will be able to tell you how much you can afford.