*This post was created in collaboration with Alpine Credits
Qualifying for a mortgage these days is tough, especially with sky-high home prices, soaring interest rates, and the need to pass a mortgage stress test. Given this, any bit of help to qualify for a mortgage would help.
If you have rental income, you could add it to your mortgage application to help nudge your lender in your favour. You may be able to use that additional income source to help increase your chances of getting approved for a mortgage.
Read on to find out what you need to know about using rental income to qualify for a mortgage in Canada.
Can You Use Rental Income To Qualify For A Mortgage In Canada?
Not only does rental income help cover your mortgage payments, but it can also increase your ability to get approved for a home loan. Not only that, but you may also secure a larger mortgage amount with the help of this added source of income.
Income is one of the key factors that lenders look at when reviewing mortgage applications. In addition to traditional income sources, they’ll look at other forms of income, including money coming in from rent. If you already have a property that you rent out and receive consistent rental income, it can be added to your mortgage application.
How Much Of Your Rental Income Can Be Used When Applying For A Mortgage?
Even though the CMHC’s rules state that all of your rental income may be used when you apply for a mortgage, your lender will likely only use a portion of the rent you plan to charge when calculating your total income.
The amount of rental income that lenders will consider varies considerably, though it could be anywhere from 50% to 80% on average. Even still, any amount of income earned can help boost your odds of mortgage approval.
| NOTE You may be required to have a lease showing how much rent you’re charging. Or, you may require a “market rent letter”, which is a real estate appraiser’s opinion of how much the unit could rent for in today’s current market. |
Can You Use The Equity In Your Rental Property To Help Get A Mortgage?
Your equity refers to what you actually own in a home. More specifically, your equity is the difference between your mortgage balance and the appraised value of your home. For instance, if your home is currently worth $800,000 and your outstanding mortgage balance is $200,000, that means you have $600,000 in home equity.
If you have enough equity built up, you might be able to put some of it towards the purchase of a home.
You can tap into your home equity by applying for a home equity loan or home equity line of credit (HELOC) with a bank or an alternative lender like Alpine Credits. You can then use those funds as part of your down payment. The higher your down payment amount, the better your chances of qualifying for a mortgage.
How Does Your Rental Income Affect Your Debt Service Ratio?
The CMHC uses four different approaches when using your rental income to calculate your debt service ratios. Depending on whether your rental property is owner-occupied or non-owner occupied, the approach will vary.
Owner-Occupied Rental Properties
The Canada Mortgage and Housing Corporation (CMHC) allows homeowners who rent out part of their homes to use 50% to 100% of their rental income as an income source when calculating their debt service ratios. To be eligible for this full amount, the following criteria must be met:
- You must live on the property that you’re renting out
- The rental unit must be self-contained with a separate entrance and meet zoning requirements
- The property can only have a maximum of 2 units
How To Calculate Your Debt Service Ratio For Owner-Occupied Homes
The percentage of gross rent is added to the gross annual income. In this case, the GDS and TDS ratio would be calculated as follows:
GDS Ratio: Annual principal + interest ÷ (gross annual income + 50% -100% of gross rental income)
TDS Ratio: (Annual principal & interest + other debts) ÷ (gross annual income + 50% -100% of gross rental income)
For example, let’s say your gross annual income is $60,000 and your housing costs add up to $20,000 per year. If the annual rent collected is $18,000 and 50% of the rental income may be considered, the formula would look like this:
$20,000 ÷ ($60,000 + $9,000)
= 0.2898, or 28.98%
A GDS ratio of 28.98% falls under the 39% maximum threshold, which should be satisfactory in the eyes of the lender.
Non-Owner-Occupied Rental Properties
For non-owner occupied rental properties (2 – 4 units), up to 50% of gross rental income can be added to your total gross annual income. Taxes and heat may be excluded from your debt service ratio calculation.
How To Calculate Your Debt Service Ratio For Non-Owner Occupied Homes
To calculate your TDS ratio, follow this formula:
TDS Ratio: (Annual Principal + Interest + Taxes + Heat) ÷ (gross annual income + net rental income)
Final Thoughts
Several key factors affect your ability to get a mortgage, and income is one of them. You can increase your total income by using rental income to qualify for a mortgage in Canada. And as long as all other factors are favourable in the eyes of the lender, you may even be able to secure a higher loan amount and perhaps a lower interest rate, too.
Rental Income FAQs
What is a debt service ratio?
How do you calculate rental income?
How much of your rental income can be used on a mortgage application?
What is a Gross Debt Service Ratio (GDS)?
What is a Total Debt Service Ratio (TDS)?
Your TDS ratio should be no more than 44%.
