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:
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%.