# 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
realpaul

Backpeddling Global TV Stooge Mikey Campbell reports that 'many BC homeowners are maxed out and in real trouble' with the rate increase Bwahahahahahahahahaha.

Isn't this the same dipshit bunch that have been cheeleading real estate over the past year and were instrumental in bashing FTBs over the head with propaganda?

He says' "Sell now while the markets still good' Does that mean we can look forward to a tsunami of listings this spring?

Further in the report they say that homeowners can only stay in their homes if they cut corners 'LIKE FOOD". BWahahahahahahhahahahahah.

They go on to say that 'homeowners have no disposable income and that homeownership cuts into your quality of life'

Bwahahahahahahahahaha heheheheheeheheheheheheheheee !!!!!!

No really ??????? Mikey, you're sooooo full of shit.

Member
joycer

@DaMann 68

Here's an example:

Say you want a 500K mortgage, that will cost you around 2200/month currently.

Old Rules,

If you have a rental suite that brings in 1000/month the bank will only need you to qualify for 2200 – 800 = 1400/month

Under the new rules, rent is treated as income and added to your monthly income at 50%. So your monthly income goes up by \$500/month, but you have to qualify for the full 2200/month

Hope that's clearer.

Guest
Anonymous

Scullboy,

Many of the people voting you down are waiters and waitresses. Tipping should be illegal.

Guest
Bystander

Now I'm going to start tipping the TransLink bus drivers, like 50c or buck a ride, depending on the zones? Also thinking of tipping members of my strata council whenever I go to the meeting depending on the agenda. And I'll definitely tip my all coworkers, just in case. Surgeon: "scalpel", nurse passes "scalpel"… boom TIP… etc.

Guest
james

Supraboy

your big red "Foreclosure" stamp is really annoying.

Guest
Robert Rennie III

Bearaholics, you are obviously huffing too much gasoline at the old service station, even a died in the wool RE jack off artist such as myself knows that rates up = prices down.

Member
VHB

"what is the big deal with inventory hitting 15K? "

You know why I like 15K, or our 'parties' in general?

a) It is fun.

b) For some odd reason, it always seems to enrage the bulls.

You sir, #65, are NOT invited to our 15K party. You are not fun. Parties are for FUN people!

Guest
Robert Rennie III

#66 Much of Canada won't have a housing bust either, but Vancouver sure as hell will have one unholy mother of a bust. Of course not until all of my projects are sold out…

Guest
Bearaholics

Mortgages rates went up yesterday but where is the big price collapse in RE prices? There isn't one! See bears, rising rates have no impact on prices. Buy now and stop grumbling or pay more in the future as rates go up even higher.

Guest
painted turtle

Someone mentioned France.

I used to make a decent wage as a waiter there, true. Service is 15% and is charged on the bill. On top of this, patrons tip if they liked the service, so I could make up to 30%.

My boss paid for medical insurance, pension, paid vacation, etc… I knew people who could earn a living, but to the expanse of their health and family life. It is a hell of a job!

Guest
dd

April 1 won't have 15K inventory because of the month end expires.

Member
DaMann

Joycer

"It used to be an 80% reduction in your mortgage payment…"

This makes no sense to me. What do you mean 80% reduction in your mortgage payment? Maybe you are wording it wrong. It's impossible for it to have reduced your mortgage payment by 80%?

I must have got the short end. rent is treated as income stright towards the mortgage payment. Used to be 80% of the rental income goes directly to the mortgage payment, Now it's 50%. Obviosuly I'm missing soemthing but this is how I and others have understood this to work.

Not saying you are wrong by any means, but it makes no sense.

Guest
Partisan Spectator

Anon 65,

A little free tip for you. Why would not you consider buying a small car sale business and running it having in mind that 50% sell ratio is "actually normal"? Try to calculate how long will it take to get the lot full. What would be your action items then?

Cheers.

Guest
Math is Math is Idem

Much of the U.S. Did Not Have Housing Bust: http://economistsview.typepad.com/economistsview/

Guest
Anonymous

what is the big deal with inventory hitting 15K? bloody arbitrary if you ask me. It is meaningless as there is crap out there for sale, and anything good gets eaten up fast with multiple bids. It means a more balance market as 8-10k is a hot market, and 50% sell list ratios are actually normal. Unless someone points out that during the 7 month 2008 correction sell list ratios were always well below 50%, it means nothing.

Also, inventory will dry up with a whack of expired listings tomorrow. So what. People love RE here and will always buy

Guest
joycer

@DaMann

"Almost Perfect 53

New CMHC rules state that when qualifying you can only use 50% of the monthly rental income from a LEGAL suite. It used to be 80%."

It used to be an 80% reduction in your mortgage payment… that makes a much bigger difference than if it was going from 80% towards income to 50% towards income. If you prefer to think of it from the income point of view, every dollar of rent under the old rules raised your qualifying income by \$2.50. Under the new rules every dollar of rent will count for \$0.50, a difference of 500%!

New rules:

m + h + t = 0.32(i + 0.5r)

vs.

Old rules:

(m – 0.8r) + h + t = 0.32i

m + h + t = 0.32(i + 2.5r)

Guest
Not much of a name

Apr 1 may not be the day. Don't forget there are usually a lot of listings that expire at month end. It could be a week longer to wait. It will happen..fo sho.

Guest
French Boy

you have to give me a tip to go and eat in the filthy restaurants that you have here, not pay a tip.

Member
Best place on meth

God bless you INVENTORY!

Looks like Greater Fools Day will be our 15,000 party.

Guest
George
A Tip is meant to be for outstanding service and the usual tip was about 10% as a minimum so how in this recession it is increased to 17% minimum up to whatever I don't know. The Cactus Club states this on its bills that 15% to 20% are guideline tipping amounts. Maybe this should be presented to revenue Canada as indication of what tips have been made in the restaurant or about 15% to 20% of revenue. It is now customary to tip in coffee shops soon it will be grocery stores and maybe soon realtors will expect tips. Its a failed system not meant to reward fantastic work for a customer but just part of subsidizing the owner of the restaurant paying for his employees wages. Perhaps the government should get involved and legislate a \$16.00 an hour… Read more »
Guest
other ted
Don't know how the tipping thing started but I am shocked how many people share my views. Then again maybe not. i find the same people who over buy in real estate to look good always preach to people how they don't tip enough. Its sort of a chip people have on their shoulder. I tip to show I am satisfied some tip to show they are someone. I do admit I am not as harsh as I used to be with bad service as I feel for people who get taken advantage by their employer. But I also feel we are all responsible for allowing it to happen. I rarely give a bad tip but I resent when its mandatory on a bill or when I get the tip question pop up on my credit card display when I… Read more »
Guest
Inventory

Update!!! 3:30pm

Mar 1, 2010 = 12,225

Mar 30, 2010 = 14,721

Guest
Bystander

Partisan Spectator Says: To me it was a big surprise to find out (when we came here) that so many people are willingly living beneath the surface.

Right, the whole that thing about rental suite in the private home is enigma to me too. Either you leave in a single detached house or you don't. The entire idea of owning the house with additional people in it is sort of bizarre. How about getting a permit to put camping site in the backyard and charge campers extra for use of washrooms?

Member
@realpaul There are so many "binners" cause it is easy out here. The weather, laws and lifestyle allow for it. If people are starving they have a choice: move. There are tons of cities where the cost of living is less. If they argue they want to stay cause family/friends are close by, then they should be turning to them for help. Too many people have their hand out to the government when they should be asking their community (family/friends) for support first. As for seniors unable to afford food. These better not be the same seniors who own properties. I've heard this argument before in Ottawa. Turns out most still owned their home and had \$100Ks of equity to tap to make their lifestyle better. Why should I subsidize someone with more savings than me? someone who lived through… Read more »
Member
Best place on meth