The cost of buying and maintaining a home in Canada seems to be constantly on the rise. Given the sky-high cost of homes, especially in places like Toronto and Vancouver, it’s no wonder the average Canadian is struggling to save up for a down payment and keep up with hefty mortgage payments.
One way to help offset the cost of homeownership is to rent out part of your home, such as a room or the basement. Collecting monthly rent from rental suites, or ‘mortgage helpers’, can be a great way to cover the mortgage. Even before you make a purchase, the potential rental income you can generate on a home that offers a rental suite may be enough to convince your lender to approve your mortgage application.
What Is A Mortgage Helper?
A mortgage helper is a rental suite in a home that can be rented out, and the rental income may be used to offset your mortgage. In addition to helping you pay down your mortgage, the rental income can also help you get approved for a higher loan amount. This may be especially helpful if you plan to buy a home in a more expensive area.
When you apply for a mortgage, you’ll need to provide rental data to determine the average rental price in your area for a secondary suite. You’ll then declare the rental income with your own income, and hopefully, get approved for a larger mortgage.
How Much Of The Mortgage Helper Suite Income Can You Use?
In past years, homebuyers were only allowed to declare 50% of the rental income that they would make off of a secondary suite to help them get approved for a larger mortgage. Recently, however, the Canada Mortgage and Housing Corporation (CMHC) changed the rules.
Now, potential homebuyers can declare 100% of the rental income when applying for a mortgage. This can help tremendously when applying for a home loan.
To qualify for the full amount of rental income, the following requirements must be met:
- You must live in the home that you’re renting out
- The property cannot have more than 2 units
- The suite must be self-contained with a separate entrance
- The suite meets zoning requirements
What Are The Requirements Of A Rental Suite?
To be considered as part of your income when you apply for a mortgage, the rental suite in question must meet certain rules and regulations:
- The unit must be self-contained within the home and include its own kitchen, bathroom, living areas, and separate entrance.
- There must be proper ventilation, effective soundproofing, and a sufficient number of windows.
- The house must be zoned to allow for a secondary rental suite.
If your house and secondary suite do not meet all the necessary qualifications, you will not be able to declare the income you’ll collect from renting out the unit to help get approved for a mortgage.
As a side note, not all cities and municipalities allow for secondary rental suites. It’s important that you research your area before you make a final decision about using a secondary suite to help get approved for a mortgage.
Can You Include Income From A Room You Intend To Rent?
The rental income from a room in your home may not be used, since the room likely does not meet specific requirements, as mentioned above. Namely, a room in a house likely is not self-contained with its own kitchen and bathroom and does not have a separate entrance.
What Are The Debt Ratio And Down Payment Requirements For An Owner-Occupied Rental Home?
Several important factors are assessed by lenders to determine whether a borrower may qualify for a mortgage, both for primary homes and rental properties. This includes debt ratios and down payment minimums.
Debt Ratio Requirements
When you apply for a mortgage, one of the factors that the lender will consider is your debt service ratio. This number measures your debt relative to your household income to see if you’ll be able to manage mortgage payments. It’s calculated by dividing your debt by your pre-tax income.
If you’re planning to rent out a suite on the home, however, you’ll also need to include the percentage of the gross rental income that you expect to collect. Assuming you’re allowed to declare up to 100% of your anticipated rental income when applying for a mortgage, the formula would look like this:
| (Annual principal & interest + all debts) ÷ (gross annual income + 100% of gross rental income) |
Let’s assume your annual income is $75,000, your total debt (including housing costs) is $25,000, and you collect $22,000 in rent per year. Using these figures, the debt service ratio calculation would be as follows:
$25,000 ÷ ($75,000 + $22,000) x 100 = 25.77%
The CMHC caps TDS ratios at 44%. So, a TDS ratio of 25.77% is well below this threshold, which can make it easier for you to get approved for a mortgage to finance a home with a ‘mortgage helper’ suite.
Down Payment Requirements
If you live in the same home as the rental unit, the minimum down payment requirements are the same as primary residences with no rental space. That is, the minimum amount required is 5% of the purchase price. The exact down payment requirements depend on the price of the home and the number of units in the property, as noted in the following chart:
| Purchase Price | Minimum Down Payment |
| $500,000 or less | 5% |
| $500,000 — $999,999 | -5% of the first $500,000-10% for the portion above $500,000 |
| $1 million+ | 20% |
Keep in mind that these minimums are based on properties with no more than 2 units.
Pros And Cons Of Using A Mortgage Helper
Buying a home with a mortgage helper has its perks and drawbacks.
Pros Of Using A Mortgage Helper
The following are some of the advantages of using a mortgage helper:
- Increase your chances of mortgage approval. The additional rental income can boost your total income amount, which can improve your odds of getting approved for a mortgage.
- Get approved for a larger loan amount. You’ll be able to use the income you’ll make from the rental suite to get approved for a larger mortgage. This can help you afford a larger house or a home in a more expensive or competitive area.
- Help offset your mortgage payments. The extra rental income can help you cover your mortgage payments and pay off your mortgage sooner.
Cons Of Using A Mortgage Helper
Dealing with a rental suite in your home will not always be easy. So, it’s important to consider the downsides of a mortgage helper before buying a home that includes one:
- You’ll become a landlord. While collecting rental income can be extremely helpful, you’ll need to assume the title and responsibilities of a landlord. That means you’ll be responsible for repairs, maintenance, collecting rent, dealing with tenant issues, and other tasks.
- Less privacy. With a renter living in your home, you’ll need to become accustomed to having a stranger sharing the property.
- You’re ultimately responsible for the rent. If you’re approved for a mortgage based on receiving a specific amount of money from a rental suite each month and you’re unable to find someone to rent out your suite, you could end up with serious financial issues.
Is Buying A House With A Mortgage Helper Worth It To Get Around The Mortgage Stress Test?
One of the biggest hurdles to buying a home is passing the mortgage stress test. This test is designed to ensure that borrowers are able to afford their mortgage payments even if interest rates increase in the future.
To pass the mortgage stress test, you must be able to qualify at a rate of 5.25% or your contractual mortgage rate plus 2%, whichever is greater. While the stress test is meant to ensure that borrowers don’t overleverage themselves and to help financial institutions avoid a slew of mortgage defaults, it can make getting a mortgage much more difficult. Further, it can reduce your borrowing power.
Some home buyers use a mortgage helper to help them pass the mortgage stress test. Since this test will consider your income and debt profile, boosting your income can help increase your chances of mortgage approval. Adding monthly rental income from a rental suite in your home can be a great way to beef up your income to offset debt.
| Note: However, using a mortgage helper to pass the stress test may not always work because homes with additional separate living suites can be much more expensive. This will increase the purchase price and the mortgage amount you may need to apply for. Further, there’s always a chance that you may not be able to rent out this additional suite. In this case, you’ll be on the hook to cover the full mortgage payments yourself. If you were counting on the rental income to help you pay the mortgage, you could find yourself in a predicament if you can’t fill the rental vacancy. |
Other Things To Consider
In addition to the added time, effort, and possible frustrations that come with being a landlord in your own home, there are a few other important considerations to make before buying a home with a mortgage helper:
- Tax obligations. Rental income is taxable. You must claim any rental income on your tax return, which can increase your taxable income and lead to higher income tax payments.
- Insurance. Your home insurance provider must be informed about the rental suite in your home, which can cost you more in premiums, making your policy a bit more expensive. If you don’t notify your insurance provider and something happens, like a fire or other issue, not only could your claim be denied, but your policy may be revoked altogether.
- Landlord compliance. In addition to the ongoing upkeep of the rental suite and rent collection, you’ll need to make sure you abide by the landlord-tenant legislation in your area. Failure to comply could land you in hot water if your tenant complains about issues like privacy and rent increases.
Bottom Line
A mortgage helper can be a great way to help you get approved for a mortgage to buy a home and to cover your mortgage payments. If your income is not strong enough to get approved for a home loan on your own, having a rental suite in your home can be the boost you need to obtain financing and become a homeowner. However, there are plenty of considerations to make before choosing this route, including your obligations as a landlord and the potential tax implications of collecting rent.
Mortgage Helper FAQs
Can you use rental income to qualify for a mortgage in Canada?
How much do you have to put down on a mortgage helper?
Can I rent out my house without telling my mortgage lender in Canada?
Does rental income count as income in Canada?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
