May 29, 2009

Rental Properties and Rental Suites

When a client wants to purchase a rental property or an owner occupied home with a rental suite, there are many issues that must be considered:

Insured: If downpayment is less than 20%, then the rental property must be insured.

CMHC has very specific guidelines for rental properties.

-          The premiums for rental purchases are much higher than for owner occupied purchases.  This is especially true for purchases with low downpayments (i.e. 5% down).  Premium for 5% down is: 6.50% for 25 year amortization!

-          CMHC looks at the intent of the buyer to determine if property is considered rental or not – i.e. it is considered fraud if you purchase the property as owner occupied but are intending it to be a rental

-          You can buy an insured property as owner occupied and decide to change your mind later and make it a rental

-          CMHC will only allow two insured owner occupied homes

-          If there is a suite in a house, rentals will only count if it is a legal suite – no illegal suites allowed

Conventional: If downpayment is 20% or more, then the rental property can be purchased conventionally (i.e. no mortgage insurance).

The guidelines for conventional rental purchases or for owner occupied homes with a rental suite vary by lender.  Here are some factors that may vary:

-          Offsets or add backs for rental revenue – this is just different ways for banks to include rental revenue for debt servicing.

-          Rental suite legal or not legal – some lenders only accept rental revenue from legal/authorized suites

• In all cases, suite has to be separate from main suite with separate entrance
• Client has to take the main suite (i.e. can not take the basement suite)

-          some lenders limit the number of rental properties you can hold (i.e. 4 or more) – reason – banks don’t want to finance a professional real estate portfolio and will consider this a commercial mortgage

Other tips:

-          application is stronger with more downpayment and if downpayment is from own resources

-          home stays or room mate rentals are never included

-          property is limited to maximum of 4 suites

-          generally, there are no formal/official stated income programs for rental properties

Matthew Chan, AMP, CA, MBA
Mortgage Planner

Dominion Lending Centres - Downtown Financial
Tel: (604) 773-2775
Fax: (604) 648-9553
Email: matt@mortgageplan.ca
Web: www.mortgageplan.ca