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New policy: CMHC to Allow 100% of Suite Income
Big news for the real estate market! The market for houses with basement apartments may soon be getting more attention. The Canada Mortgage and Housing Corporation (CMHC) has announced it will now allow 100% of the rental income from legal secondary suites to be used when qualifying for a mortgage. Currently it allows just 50%. The new rule will come into effect as of September 28th, 2015.
Canada’s largest default insurer says this move is meant to “facilitate affordable housing choices for Canadians.” Also CMHC adds that “secondary rental suites are recognized as a source of affordable housing offered at a cost that is often lower than those for apartments in purpose built rental buildings.” Secondary or basement suites also give lower-income families a chance to live in single-family residential neighbourhoods.
Peter Kinch, a Vancouver-based broker, comments that it is very good news for those who are looking to buy a house and subsidize the cost with a renter. Also, the ability to use 100% of the rental income to qualify for the mortgage can truly make a large difference for many homeowners and may push a larger number of home buyers from condo purchases to a single-family home with a mortgage helper.
Concierge Mortgage Group Broker Marg Green is in agreement that there will be a big demand for it but there will definitely be a need for more clarity on what CMHC considers a legal suite. “What is legal? Is it fire retrofitted? Is it registered with the city? If the suite is not legal, lenders generally will not use the rental income (for qualification purposes),” Marg Green says.
Here is what has been deduced so far, with respect to what is required to use 100% of suite income with CMHC:
- The property must be owner-occupied
- The property being insured can have only two units (such as a duplex or a single home with a legal secondary suite)
- Rental income cannot be used if the suite is “illegal/non-conforming” but “legal non-conforming” is okay (Non-conforming meaning that the suite was grandfathered in before regulations restricted such units. You can check with the city to confirm if a suite is legal or not)
- The suite must be self-contained with its own entrance
- Property taxes and heat must be factored into the borrower’s debt ratios (which is currently not looked at when using rent from legal secondary suites)
- For existing units, there must be a two-year history of rental income from the suite and the maximum rental income allowed for qualification is a two-year average of the unit’s rent
- For new units, a market rent appraisal can be accepted if an appropriate vacancy rate has been applied to the estimated rental income
- Mortgage applicants must “demonstrate a strong history of managing credit” with a minimum credit score of 680
On 3 to 4 unit owner-occupied properties and 1 to 4 unit non-owner occupied rentals, CMHC will be allowing a net rents calculation (meaning gross rents less operating expenses).
Also it should be noted that individual lender guidelines may possibly be tighter than what has been listed above.
Genworth and Canada Guaranty have had a 100% add-back policy for some time now on basement suites, but mostly in Victoria and Vancouver. CMHC’s new policy extends Canada-wide. Both private insurers say they are in the process of reviewing CMHC’s changes and have not yet decided if they will try to match this guideline.
Peter Kinch says that in the big picture, he does not see that this will have a significant impact on the overall housing market. Yet he adds that in specific suburban areas, this shift in the policy will help speed up a trend that is already taking place, and that is the growing price-gap between single-family and multi-family homes such as condos and townhouses.
A possible issue that could potentially arise once the new policy is in place could be that the move could encourage more people to lie about owner-occupying a property, for example: saying they are living in one unit but actually renting out both units. That small possibility aside, CMHC has done well and should be recognized for trying to boost the stock of affordable rentals and providing young home buyers with an alternative to condo living.
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