Rental Income in Mortgage Qualification

Banks are hyper-conservative when considering rental income in mortgage qualification. This is due to possible vacancies and loss of income for possible extended periods. While this is not likely, at least in the BC Lower Mainland, policy is created for lending across Canada and vacancy rates can be much higher in smaller communities.

Banks are also considering things like maintenance/repairs and the fact that tenants are harder on properties than owners – no pride of ownership – so the value can be negatively affected which is a risk to their security.

In most cases banks usually only count 50% of rental income to be added to a borrower’s annual income. Only 39% of total annual income needs to be enough to cover all property obligations so really only 39% of half the rent is used. The idea being that if the property couldn’t be rented for an extended period of time due to vacancy or a major repair the applicant would still be able to cover the property obligations comfortably.

For example, let’s say you own a rental house with these monthly payments:

Mortgage payment          – $1,500

Property taxes                  – $166.67 ($2,000/year)

Heating allowance           – $125

Property Obligations:     – $1,791.67/month

Say you rent it for $2,000/month – it pays for itself! Sounds good.

Here’s how the banks look at it they will only consider

Half monthly rent           – $1,000/month ($12,000/year)

39% of half                        – $390/month

Extra property cost         – $1,401.67/month – included in debt-servicing

If it’s a stand-alone rental property some banks will look at a rental offset which is a more generous way of looking at it. That’s where they consider a portion of the rental income offsetting the rental property obligations first, and then either adding the surplus to income or adding the shortfall as additional monthly debt. Most banks will not include a heating allowance and some even property taxes when calculating an offset.

But banks are still conservative and consider 50% to 80% of income for an offset in most cases. Taking the same example above at 50% offset that’s $1,000 off the mortgage payment so it is a $500/month residual mortgage payment that is to be included in qualification – not as much as the Add to Income method but that’s like having another car loan. And at 80% that’s still another $100/month payment that needs to be factored in.

So while investing in real estate is a solid gamble and can be profitable banks want to know borrowers are strong enough to maintain payments even in the worst-case.

As always, reach out if you have any mortgage questions – I’m here to help!

• Written by Kristin Woolard

Times are a changin’ – But really for the worse?

All we hear about on the news these days is how dire things are in the world right now. With inflation still on the rise, the war in the Ukraine and the ongoing disruption of the supply chains it feels like all we hear is the alarm of Chicken Little – ‘the sky is falling!’.

But let’s get a little perspective… over the past 2 years with record low interest rates and pent-up demand coupled with the COVID driver in the real estate market, things have been going at break-neck speed. Ever hear the saying when you’ve been travelling at 150mph and slow down to 100mph it seems like you’ve almost stopped. But really, you’re still going 100!

The real estate market has cooled and mortgage interest rates have actually returned to more normal levels. Money has basically been on sale over the past 2 years and now that we’re seeing 5-year fixed rates at around 5.50% and Variable interest rates set to be close to 4.25% by mid July that’s basically on par with the new normal that was established after 2008/09 global economic melt down.

In my 20 years’ experience I’ve seen it usually takes about 2 years for a major market disruption to filter through the mortgage industry. Banks make policy adjustments, government reviews bank policy to ensure prudent lending practices are being adhered to and Canadians still need homes and with that, mortgages. And the floodgates of Immigration haven’t even been opened all the way yet…

So while it may feel like this isn’t the right time to do anything with your house or mortgage it might actually be the ideal time to let your home help you out.

Property values are still strong so you likely more equity in your home than you did 2 years ago. That means you have more power to accomplish financial goals now that you may not have had in 2019 or earlier.

If you still need to upsize to get the office space you need working from home more now, you can always port your existing mortgage and just add any extra money to it to buy that new home.

Interest rates are likely higher than what you have on your current mortgage so if you have to break your mortgage now for any reason that actually translates into a lower penalty to do so – likely only 3-months of interest.

And here’s the tough reality… we don’t know when the cost of living might start coming down. Groceries are almost double and don’t even get me started on gas! If you’re feeling the pinch maybe it is an appropriate time to see how using the equity in your home can help ease things. Refinancing your mortgage to pay off loans, credit cards and lines of credit could reduce your monthly out-put and give you some much-needed relief.

As always, a mortgage professional can help get you the information you need to make an appropriate decision. A mortgage analysis is free so why not see what your options are! And I’m here to help.

• Written by Kristin Woolard