# You’ll need to earn more money

Joycer posted this on the weekend, but it got held up in moderation and is worth a second look.  According to his analysis the new CMHC qualification rules for rental income are going to have a big impact for anyone counting on a ‘mortgage helper’ to qualify for a larger mortgage.  If your eyes don’t glaze over at the math, see if you can see any holes in this reasoning:

Since we’re talking about how the new rules will affect rental income, I thought I’d do some math to see the net result. For those of you who aren’t interested in the math, here’s the punchline:
After April 19th your annual qualifying income is reduced by 30x(monthly rent).

For example, suppose there is a house for sale with a rental suite that generates \$1000/month. If the potential buyers need an annual income of 70K to qualify for the loan before April 19th, then they will need to make 100K for the same loan under the new rules.

Here’s the math:
According to CMHC’s website, monthly housing expenses (which include taxes and heating) must not exceed 32% of your gross monthly income.

m = mortgage payment
r = rental income
i = gross monthly income
h = heating expenses
t = taxes

Under the current rules:
(m – 0.8r) + h + t = 0.32i

Under the new rules:
m + h + t = 0.32(i + 0.5r)
m + h + t = 0.32i + 0.16r
(m – 0.16r) + h + t = 0.32i

Comparing the changes, the difference between the old and new rules is (m – 0.8r) vs. (m – 0.16r). To qualify for the equivalent loan under the new rules the rental income would have to increase by 5 times. Since 50% of rental income is added to your gross income, that means your gross monthly income needs to increase by 2.5 times rent. For an annual salary that means 2.5 x 12 = 30 x rent.

You can verify this on the CMHC’s own calculator:
http://www.cmhc-schl.gc.ca/en/co/buho/buho_007.cfm

For example if you are using the \$1000/month rent example it will increase your maximum monthly mortgage payment by \$800 with the old rules.

If you put in \$5000 for the monthly income (does not matter tax/heat you use), then change it to 5000 + 2.5 x 1000 = 7500 you will see the maximum monthly mortgage payment increases by \$800 just like under the old rules. The difference though is an income of 60K vs. 90K!

Addendum: Above are the two formulas I came up with, one as change in principle under the new rules, and the other the change in rent. It’s interesting to play around with the numbers, for example a \$600,000 mortgage requires \$2650/month over 35 years at 4%. Assuming this is a typical detached mortgage for someone with a suite that generates \$1250/month, the same people will now qualify for 22% less mortgage or 130K less. In order to make up the gap previously they need to increase their monthly income by \$2500.

One change I can see coming from this is how the suites are valued when selling a home. In my example above, the suite adds an extra 130K to the mortgage a potential buyer can qualify for compared to the new rules. The only way around the rules of course is to come up with 20+% down… maybe Flaherty did effectively raise the minimum down payment for homes with suites to 20%.

Guest
Wreckonomics

Wow supperboy, you're up early today. Having trouble sleeping?

Excellent post Joycer, it's amazing how much difference this change makes considering it's one we didn't hear much about when they announced the new rules.

They've done a good job with making a big change seem small with this one, since most peoples comprehension is at the same level as supraboys.

Guest
Anonymous

Sounds like time for an agent will rebuttal. Cmhc only uses legal suites. Math is correct but how many properties fall under this rule?

Member
Hey Supra, late night on the ol' dick suckin' circuit? I guress those die cast action figures don't pay for themselves. Jesus you're stupid. I can't figure out if it's a generational thing or a cultural thing, or a geographical thing. Your brand of thinking is pretty epidemic in Van, I'll give you that. I saw so many people trying to act like they're high rollers in Van. I'm looking forward to you and all your idiot buddies learning the hard way that nickel and diming is the way to go. Take case of the pennies and the dollars take care of themselves. For the rest of you, I present exhibit A on Why Van's Housing Market Is Stupid Expoensive: Behold, Supraboy! Here's a man with a shitty, low level IT job living by his own admission in his parent's… Read more »
Member

It’s a very clever way to keep the price you see on the menu low, while ensuring their staff don’t have to sleep in carboard boxes outdoors.

That's a polite say of saying that it's a clever way to defraud their customers. Why they are allowed to get away with this I don't know. I have an even harder time understanding why anyone would think of eating in such a place.

The price you see on the menu – or at the gas pump – or on the supermarket shelf, etc. – should be the price you have to pay. A gratuity is something you don't have to pay, by definition.

Just another example of the ongoing "something for nothing" economic and moral decline of "The Best Place on Earth" IMHO.

Guest
Kite towards moon

This post is an complete anual guidelines package for this decade to tell people why Van RE will never go down.the need to increase rents, success of Vancouver real estate and rental market.New rules are inventory killers because 20% sellers may not qualify to buy again under the new rules,Why would they sell? Rents increases are also on the card so the current owners can countinue with residential status and the new buyers can easily qualify.These new rules will also generate success for condo market as affordability shift or will force new buyers to get a piece of Van RE Condo or studio as starting point.There was no need to deny the fact as under fear for interest rates increase and disappearing future supply,Oppertunities are disappearing every day.

Member
http://www.theglobeandmail.com…..le1516948 Complete nonsense. Real rents are not any higher in major Canadian cities – except Alberta, where real wages are also up – than decades ago. The report calls upon governments to partner with real estate developers and civil organizations to increase the amount of affordable housing in the country, saying such changes would have positive impacts on both Canadians' health and the national productivity level. Translation: the Conference board wants government to subsidize the RE industry. The article, and apparently the Conference Board, make no distinction between the affordability of renting and buying. Well if buying is too expensive, just don't buy. If everyone did that house prices would have to be reasonable. If the government had any concern about people paying too much for houses, it could simply restrict the amount they could borrow. What could be more… Read more »
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joycer
I don't know the new rules for investment properties well enough to know how rental income is treated for a mortgages which are not primary residence, but that would certainly be considered a legal suite (ie. renting out a condo). Regardless of how rent is treated (80% supplement vs. 16% supplement) they still have to come up with the down payment which will go from 5% to 20%. That tells me there will be a lot of people who intended on buying an investment property later this year who will now buy before the changes on April 19th. Afterall, on a 500K property your down payment goes from 25K to 100K. I imagine that realtors are having this same conversation with their potential investment clients right now. I know personally on a investor who bought into a rent to own… Read more »
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Patriotz: That URL didn't work for me, you might want to check and re-post. I'm not sure how to feel about your thoughts on gratuities. On the one hand I understand where you're coming from. you shouldn't have to pay gratuities, it should be voluntary. On the other hand, most establishments post their menus so you can read them before you sit down to eat. I think there's an argument that you could consider the gratuity as a "line item" in the bill, if you get where I'm coming from. Most of the wait staff I know have brutal jobs. People will put up with a lot of bad service in other industries, but oh boy if you're 10 minutes late with their food or it's not done the way they think it should be done, look out! I'm not… Read more »
Member
canhome

Cool interactive chart: BoC Prime Business and Average Residential Mortgage Lending 5 Year Rate History for 75 Years

Member

I think there’s an argument that you could consider the gratuity as a “line item” in the bill, if you get where I’m coming from.

A gratuity is something you don't have to pay. Got that?

What you have to pay is, or certainly ought to be, the price on the menu.

What part of the above don't you agree with?

Member
Now Patriotz, no need to get all cranky. If there's an additional fee, let's say 15% gratuity on tables of 4 or more, or 10% surcharge on everyone or whatever and that information is printed on the menu, then by definition the price is on the menu, and you have no cause for complaint. As I had said, the problem currently is that restaurants don't pay their staff a living wage. BC now has the lowest minimum wage in the country, and restaurants usually pay wait staff minimum wage. As long as a restaurant clearly states in its menu that there's an additional fee for service or surcharge in certain conditions, I personally have no problem with it, and neither should you. It's up to the diner to RTFM and understand the charges there, just like any other service…. purchasing… Read more »
Guest
Get A Real Job
Mandatory tipping is idiotic…. A tip is for excellent service…not crappy service, not mediocre service, but excellent service. Read up on the origins of a tip if you need to understand this… Canadians have one of the largest number of jobs that seek tips in the developed world… Oh you poured my coffee, here is a tip… If you have a problem with the wage, don't work there or ask your employer to pay a fair wage. People wonder how people can afford to live here? Go work as a waiter or bartender or waitress in a bar or popular restaurant. Do the math in a bar – a tip of 50 cents or one dollar for every couple of drinks, and you are swimming in it… Those guys make tons of money, the vast majority of it tax free.… Read more »
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Get A Real Job

When you travel, you soon learn how tips are not required in every culture for taking a cab, having a beer poured, a cup of coffee given to you, gas pumped, etc. Canadians in the service sector always have their hands open, waiting for a tip.

Guest
Rent-o-rama

Hey Scullboy, what is your opinion on using the pre or post tax total when it comes to tipping. I have always tipped on the total bill at about 15% but I noticed during the olympics there was an 18% auto-grat on the pre-tax amount – the tip worked out to be about the same.

Personally, I would like the "tip" included in the bill. It is clear it is not a really a tip but an expected service charge to compensate the staff. If all costs are included in the bill, then the issue of compensation to the staff is a negotiation between the owner and his staff – just like any other business.

Guest
Anonymous
Our unstoppable housing market may have met its match Canada’s unstoppable housing market faces a challenge. To stay unstoppable, it needs mortgage rates to remain low and affordable. But to keep setting new sales records, it also needs more people to land more jobs so they can afford to buy more homes. The problem is it’s next to impossible for the economy to produce both these happy outcomes. Interest rates usually stay low only if unemployment remains high. Once jobless numbers start falling, mortgage rates typically shoot upward. Hoping for both low interest rates and lots of jobs is like a farmer praying for both dazzling sun and buckets of rain. Whatever happens over the months ahead, the real estate market will face resistance from either higher rates or continued unemployment. If you’ve been betting on continued strong increases in… Read more »
Member
If the job's so easy and the money's so good, why don't you try doing the job for a while? If you don't want to do that, then feel free to buy yourself a copy of "Waiter Rant" or check the author's blog for the perspective of someone who has been serving others for years. Some wait staff make great money but that's because they offer great service. In the vast majority of cases tipping is voluntary. Clearly if the practice of tipping is mainly voluntary and the staff are pulling in good money, then the staff is doing a good job, QED. If your 19 year old cousin is pulling in good money, then good on her! If your best friend's girlfriend is pulling in good money, good on her too. I guarantee you both of them are working… Read more »
Member

Thanks for all the numbers.

Member
"I must talk to 5 people a week who say: "I've lost a ton of money in the stock market over the last ten years, but I've still got my house, and our plan is to sell our \$1.2 million house and downsize to a \$500K condo, in the next two or three or four years." At VREAA: Transcription of quotes from Danielle Park, an Ontario based portfolio manager and financial advisor: http://wp.me/pcq1o-Ei "I think that boomers are going to find out that the population behind them has a whole lot less money and a whole lot less appetite for the million dollar homes." — A crucial component of the coming Vancouver RE price bust will be the liquidation of properties by those owners whose financial futures are entirely wrapped up in the market price of their primary residence. -vreaa
Member

Rent-o-rama:

Normally I tip on the pre-tax amount. It's my understanding that's customary.

I agree the tip should be incorporated in the price of the bill somehow, but most restaurant/bar owners are incredibly stingy. You wouldn't believe some of the things that go on in the industry, you really wouldn't. Many owners steal tips. I once worked a wedding reception held in a resto. There was a 15% surcharge on the total bill, and the bill was something like \$15,000 at the end of the day. That's a 2,250 gratuity. There were 4 cooks 3 waiters and a bartender. We should each have received about 300 dollars. I got my envelope and my share of the gratuity was….. 35 bucks.

Guest
Not much of a name

And just why are you guys arguing about tipping? What does that have to do with rental quites and the affect of the new CMHC rule changes???

Guest
Starving Artist

Oh god please not a tipping debate….

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renews

This coming from news:

Foreclosure all too common in B.C.

One in five Canadian households struggling

VANCOUVER (NEWS1130) – One-in-five Canadian households struggles to afford the cost of their home, according to a new study from the Conference Board of Canada. Foreclosure is already a reality in many communities across the province.

Vancouver Foreclosure lawyer Brian Markus says smaller markets like Vancouver Island, and the Interior are mostly responsible for an increase in business lately.

But trouble looms closer to home in areas like Surrey, Maple Ridge, and Mission. "[It's] a little bit surprising at this stage. I'm seeing there's a bit of an increase in the instructions I'm receiving to foreclose."

He says people with privately held first, second and third mortgages appear to be most at risk and are most vulnerable to a rate hike by the Bank of Canada.

Guest
Rent-o-rama

I was reading an article on CNN about travel this summer and the following quote caught my eye

"China hasn't seen the tourism boom it expected after the 2008 Summer Olympics, so hotels there are slashing rates to attract business", he said.

I guess the expected massive post-Olympic tourism bump that is being forecast for Vancouver may be somewhat elusive.

Guest
Math is Math