Get a free, no obligation personal loan quote with rates as low as 9.99%
Get Started You can apply with no impact to your credit score

*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 can 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?

Simply put, your debt service ratio is a measure of your monthly income relative to your monthly debt. It’s calculated by dividing your monthly debt by your monthly pre-tax income, multiplied by 100 to arrive at a percentage.

How do you calculate rental income?

To calculate rental income, add up all rent collected in the year, and subtract all expenses related to your rental property from your gross annual rent income. This will give you your net rental income. For example, if the monthly gross rent charged is $1,500, and your yearly expenses are $3,500, the calculations would be as follows: $1,500 x 12 months = $18,000 (annual gross rental income) $18,000 – $3,500 = $14,500 (net rental income)

How much of your rental income can be used on a mortgage application?

While the CMHC may allow all of your rental income to be considered on a mortgage loan insurance (MLI) qualification application, most lenders will only allow anywhere from 50% to 80% as part of your rental income calculation. The exact amount will differ from lender to lender. 

What is a Gross Debt Service Ratio (GDS)?

Your Gross Debt Service Ratio (GDS) measures all your monthly housing costs — including mortgage payments, utility bills, property taxes, condo fees, etc. — relative to your monthly gross income. Ideally, your GDS ratio should be no more than 39%, according to the CMHC. If it’s higher, this may be an indication that your housing expenses are too much for your income to handle. In this case, you run the risk of having your mortgage application turned down. 

What is a Total Debt Service Ratio (TDS)?

Your Total Debt Service Ratio (TDS) factors in all monthly expenses included in your GDS ratio. But it also includes all other debt, such as credit card debt, personal loans, and other forms of debt. 
Your TDS ratio should be no more than 44%.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

More From This Author

Special Offers

More From Our Experts

https://loanscanada.ca/wp-content/uploads/2021/06/Mortgage-Stress-Test-Updates.png
Uninsured Mortgages Explained: OSFI Stress Test Changes and What They Mean for You

By Sean Cooper
Published on December 5, 2024

Due to the effects of COVID-19, OSFI has announced that it will be making some changes to the mortgage stress test for uninsured mortgages.

https://loanscanada.ca/wp-content/uploads/2024/11/Buying-A-Second-Home-And-Renting-Out-The-First-In-Canada.png
Rules For Buying A Second Home And Renting Out The First In Canada

By Lisa Rennie

Learn the rules for buying a second home and renting out the first in Canada, and how each type of property is treated.

https://loanscanada.ca/wp-content/uploads/2024/11/how-to-buy-a-house.png
How To Buy A House In Canada: A Step-by-Step Guide

By Lisa Rennie

Buying a house is a complex process. We've broken down each step so you know exactly what's to come when buying a house.

https://loanscanada.ca/wp-content/uploads/2024/11/Secondary-Suite-Incentive-Program.png
Boost Your Property Value: Secondary Suite Incentive Programs Across Canada

By Sean Cooper

Thinking of adding a basement suite to your home? Find out how you can cover your costs using the government secondary suite incentive programs.

https://loanscanada.ca/wp-content/uploads/2024/10/HOME-STAGING.png
Benefits Of Home Staging In Canada

By Jessica Martel

Thinking about staging your home? Find out how staging a home can result in a faster sale and an increased purchase price.

https://loanscanada.ca/wp-content/uploads/2024/10/House-flipping.png
House Flipping Tax Rules In Canada

By Sandra MacGregor

Find out how viable house flipping is to generate income given the new anti house flipping tax rules in Canada.

https://loanscanada.ca/wp-content/uploads/2024/10/home-equity-emergency-fund.png
Should You Use Home Equity As An Emergency Fund?

By Lisa Rennie

If you have a financial emergency would tapping into your home equity be a good idea? Find out if a HELOC or home equity loan in a good option.

https://loanscanada.ca/wp-content/uploads/2015/10/How-to-shop-for-a-mortgage.png
How To Successfully Shop For A Mortgage

By Caitlin Wood, BA

Click through to read our three step guide and learn how to successfully shop for and get your mortgage approved.

Recognized As One Of Canada's Top Growing Companies

Why choose Loans Canada?

Apply Once &
Get Multiple Offers
Save Time
And Money
Get Your Free
Credit Score
Free
Service
Expert Tips
And Advice
Exclusive
Offers

Build Credit For Just $10/Month

With KOHO's prepaid card you can build a better credit score for just $10/month.

Koho Prepaid Credit Card