Securing a mortgage in Canada has become increasingly challenging due to rising home prices and high interest rates. However, leveraging rental income can improve your chances of getting approved and even help you qualify for a larger loan.
If you own a rental property or plan to generate rental income from a portion of your home, you may be able to use that income to strengthen your mortgage application. Here’s what you need to know about how rental income can impact your mortgage eligibility in Canada.
Can Rental Income Help You Qualify for a Mortgage?
Yes, rental income can play a significant role in mortgage approval. In addition to helping you manage your mortgage payments, lenders may consider rental income as part of your total income when assessing your application.
Since income is a key factor in determining mortgage eligibility, any additional income, such as rent from tenants, can improve your chances of approval. Some lenders may even allow you to use rental income to qualify for a larger mortgage.
How Much Rental Income Can Be Used for a Mortgage Application?
Most lenders will only factor in a percentage of your rental income, typically ranging from 0% to 80%, depending on the lender’s policies.
To verify rental income, lenders may request:
- A lease agreement showing rental payments.
- A market rent letter from a real estate appraiser estimating the rental value based on current market conditions.
- Most Recent T1 General with your T776 Statement of Rental to confirm rental expenses for existing rentals.
Even if not all rental income is counted, it can still boost your overall application and improve your borrowing potential.
Understanding Subject vs. Non-Subject Rental Income
Subject Rental Income
This refers to rental income from the property being financed (the home for which you are applying for a mortgage). Lenders may allow 50% to 80% of this income to be included in your application, either through an income add-back or a rental offset calculation.
Example: If you purchase a duplex, live in one unit, and rent the other, the rental income from the second unit is considered subject rental income.
Non-Subject Rental Income
This is rental income from properties you already own that are not part of the current mortgage application. Lenders usually count 50% – 80% of non-subject rental income in total income calculations, but some use a rental offset approach, deducting rental expenses instead of adding rental income.
Example: If you own a condo that you rent out and are now buying a new primary residence, the rental income from the condo is non-subject rental income.
Home Equity from a Rental Property
Home equity is the difference between the market value of your property and the outstanding mortgage balance. For example, if your rental property is worth \$800,000 and you owe \$200,000 on your mortgage, your equity would be \$600,000. The equity in your rental property can be used to help secure a mortgage for another home.
How to Access Home Equity for a Mortgage
If you have enough equity built up, you can tap into it by applying for:
- A mortgage refinance on the current home
- A Home Equity Line of Credit (HELOC) is available primarily for owner-occupied properties, however there are a few lenders who still allow HELOCs on rental properties at a reduced loan to value.
These funds can then be used for a down payment on another property, increasing your chances of mortgage approval. Note that lenders generally require you to keep at least 20% to 25% equity in the property after refinancing.
How Rental Income Affects Your Debt Service Ratio
Lenders use debt service ratios to assess your financial ability to handle mortgage payments. Insurers such as CMHC, Sagen, and Canada Guaranty apply different calculations depending on whether your rental property is owner-occupied or non-owner-occupied.
Owner-Occupied Rental Properties
If you rent out part of your primary residence, the rules differ compared to non-owner-occupied rental properties. CMHC allows 50% to 100% of rental income to be counted, provided you meet the following conditions:
- You live in the home.
- The rental unit has a separate entrance and meets zoning rules.
- The property has no more than two units.
Owner-Occupied Rental Properties
For non-owner-occupied rental properties (investment properties with 1 to 4 units), lenders typically allow up to 80% of rental income to be added to your total income. Some may apply a rental offset calculation, deducting expenses before considering the income.
Debt Service Ratio Calculation for Owner-Occupied Homes
Lenders use two ratios to determine if you can afford a home loan:
- Gross Debt Service (GDS) Ratio:
- How It Works:
Divide your annual housing costs (principal and interest) by your gross annual income plus a portion of your rental income (usually 50% to 100%). - Example:
- Annual Salary: $60,000
- Annual Housing Costs (Mortgage + Property Tax + Heating + Condo Fees): $20,000
- Annual Rental Income: $18,000 (50% considered = $9,000)
- Calculation: $20,000 /($60,000 + $9,000) = 28.98%
Since 28.98% is below the 39% threshold, the lender may approve the mortgage.
- How It Works:
- Total Debt Service (TDS) Ratio:
- How It Works:
Divide your annual housing costs plus other debts by your gross annual income plus a portion of your rental income. - Example:
- Annual Salary: $60,000
- Annual Housing Costs + Car Payment, Credit Card Payments, Loan Payments and Lines of Credit: $30,000
- Annual Rental Income: $18,000 (50% considered)
- TDS Calculation: $30,000 / ($60,000 + $9,000) = 40%
- How It Works:
The lender may approve the mortgage since this is below the 44% maximum TDS threshold.
Using Rental Income to Increase Your Mortgage Amount
By increasing your total reported income, rental earnings can help you qualify for a larger mortgage. By increasing your total reported income, rental earnings can help you qualify for a larger mortgage. However, each lender has different rules about how much rental income they will include in their assessment.
To maximize the benefits of rental income for mortgage approval:
- Keep detailed records of rental payments.
- Ensure you have a lease agreement in place.
- Obtain a market rent letter if required by the lender.
- Consider working with a mortgage broker who can help navigate different lender policies.
Income plays a vital role in mortgage approval, and rental income can be a valuable asset when applying for a mortgage in Canada. If you meet lender requirements, this additional income stream may help you qualify for a larger mortgage and potentially even a lower interest rate.
Frequently Asked Questions
- What is a debt service ratio?
A debt service ratio measures your income compared to your debt. It’s calculated by dividing monthly debt payments by monthly pre-tax income.
- How do you calculate rental income?
To calculate net rental income, subtract rental expenses from the total rent collected:
Annual Gross Rent – Expenses = Net Rental Income
Property expense calculations vary from lender to lender and are based on application details.
- How much rental income can be included in a mortgage application?
Most lenders allow 50% to 80% of rental income to be used in a mortgage application, but policies vary.
- What is a Gross Debt Service (GDS) Ratio?
GDS measures your housing costs (mortgage, condo fees, utilities, and taxes) relative to your income. The CMHC recommends a GDS of no more than 39%.
- What is a Total Debt Service (TDS) Ratio?
TDS includes all debt obligations (including credit cards and loans). A TDS ratio should not exceed 44% for mortgage approval.
