How much of a mortgage do you qualify for? You went to your bank and they told you $xxx,xxx; are they right? Your dream house costs a bit more, is there any way to get it? With a good mortgage broker on your side the answer is likely "yes".
We have all heard the term "mortgage helper". In this day and age rental suites are becoming more and more prevalent. In fact, 25% of homes in BC contain one and almost 40% in the Lower Mainland. In Vancouver alone there are 26,600 rental suites which accounts for roughly 20% of all the rental stock in the city. So how is the rental income helping people qualify for mortgages and how could it be helping even more?
Let us first examine how you qualify for a mortgage. In an attempt to lessen the average Canadian household's debt the Federal Government legislated the amount Canadians can spend on mortgages. By law you can use no more than 32% of your income to pay your monthly mortgage payment, property tax, 50% of strata fees (if applicable) and home heating costs. If you have exceptional credit, and a good mortgage broker to negotiate on your behalf, some lenders will let you go as high as using 39% of your income.
Most banks, the vast majority, will take 50% of a property's rental income and add it to your employment income. This means if you make, for example, $50,000/ year and the property brings in $1,000/ month, or $12,000/ year, in rental income your bank will increase your annual income to $56,000. This increase does little to raise the amount of home you can afford.
- 32% of your $50,000 annual salary, $16,000, is permitted to be used on your housing costs. So $1,333/ month to pay your mortgage payment, property tax and heating
- Assuming it costs $80/ month to heat your home, property tax of $2,400/ year or $200/ month you are left with $1,053 to make mortgage payments per month
- At today's rates, averaging 2.6 - 3%, that will finance you approximately $222,000. When the bank adds 50% of your rental income, $6,000/ year, to your income the amount you can finance goes up to $255,000
Now examine the same scenario when your mortgage broker has found you a lender who will use an 80% "rental offset". Your income remains the same at $50,000/ year and 32% of that is still $16,000/ year, $1,333/ month, to make your mortgage payment, pay your property tax and heat the home.
- To finance $300,000, at today's interest rates, would cost approximately $1,425/ month
- Our $50,000 income still only allows us mortgage payments of $1,053 after heating and property taxes
- Lenders who use a rental offset deduct the rental income, in our case 80% of the $1,000 monthly rental income or $800/ month, from the monthly mortgage payment
- To finance $300,000 now only require the ability to qualify for a $625/ monthly mortgage payment; the $1,425 monthly payment minus our monthly rental offset of $800
- To finance $400,000 would cost roughly $1,900/ month, but, once offset with rental income, the monthly payment one would have to qualify for would be $1,100
- It would take approximately 33% of your $50,000 annual income to satisfy the financing requirements for a $1,100/ month mortgage payment. This is a number that your mortgage broker will be able to negotiate if you have shown good credit history
By pursuing a lender who offers a "rental offset" instead of a "gross up" strategy to recognizing rental income you have gone from a $255,000 mortgage to $400,000 without earning a dime more.