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CMHC Announces New Rules to Increase the Buying Power of Purchasers with Legal Rental Suites

CMHC Legal Rental Unit Vaughan

Canada Mortgage and Housing Corporation has announced new rules for mortgage qualification with regards to legal rental suites, increasing the purchasing power for many homebuyers in this market. Currently, CMHC only allows 50% of the rental income from legal secondary units to be used for qualification. As of September 28, 2015, that will increase to 100%.

The purpose of the change is to boost affordable housing for renters in a market that is becoming less affordable for many Canadians each year.  It would offer Canadians more affordable housing than many apartment buildings, and allow these renters to live in residential neighbourhoods that likely weren’t an option previously, as many more Canadians will be looking to upgrade their homes to conform to these new guidelines, further increasing the market for multi-unit properties.

This change would target two-unit owner-occupied homes and will include legal basement rental units. The key word here is ‘legal’. In order for a basement apartment to be considered legal, it must be self-contained with its own kitchen, bathroom, and sleeping facilities.

Purchasers with less than a 20% down payment that are borrowing via institutional lenders must get government-backed mortgage default insurance. Previously, even lenders that may have allowed 100% of rental income to be included for qualification through their underwriting policies for purchases with 20% or more of a down payment, had to change these policies to match CMHC’s once mortgage insurance was necessary.

What is considered a legal rental unit according to CMHC?

The full details are still being ironed out, and there still may be some slight changes to come, but at the moment, here is what CMHC considers to be a legal rental unit:

  • The property must be an owner-occupied, primary residence.
  • The rental unit must be self-contained with a private entrance. It must also have its own kitchen, bathroom and sleeping facilities.
  • The property can only have a maximum of two units (a single home with a legal secondary unit, or a legal duplex).
  • Rental income can also be used for qualification if the secondary unit is ‘legal, non-conforming’, but cannot be used if the unit is ‘illegal, non-conforming’. A non-conforming unit is defined as ‘continuing use of real property, permitted by zoning ordinances, in a manner in which other similar properties in the same area cannot ordinarily be used’. In other words, these types of properties must have been grandfathered in prior to rule changes in specific municipalities.
  • The existence of rental income must be proven via a valid lease agreement. If there is currently no lease agreement in place, then a market rent appraisal must be completed in order for rental income to be included in the application.


What does this mean for homebuyers?

With home prices soaring over the past few years, affordable housing options are becoming difficult to find for many homebuyers, specifically those looking to get into the market with their first home. These rule changes may help homebuyers that were looking at condos solely because of affordability, to be able to now qualify for and purchase a single-family home, while renting out the basement to offset some of their mortgage costs.

For those looking to purchase 3-4 unit owner-occupied properties, or 1-4 unit non owner-occupied rentals, the qualification for these types of properties is slightly different. CMHC will only allow for a net rents calculation, meaning operating expenses must be subtracted from the gross rental income. This type of calculation allows for less purchasing power than CMHC would allow for an owner-occupied, legal rental unit.

However, this must still fit with each individual lender’s policies, as not all lenders qualify rental properties in the same way. It’s extremely important that you deal with a mortgage broker that is up to date on all of these rules and has the knowledge of all lenders available in the Canadian market, to ensure you conform to both theirs and CMHC’s policies, while still getting a great mortgage product and rate. Most of the major banks have far stricter rules when it comes to rental qualifications than many of the institutional lenders available to the brokering community.


Jeffrey Hristovski is the President and Principle Broker at MortgageMeister.com Ltd, a Toronto mortgage brokerage.  Please contact MortgageMeister.com today for all of your investment rental property purchases and refinances. We have the knowledge, experience, and lenders available to fit your entire rental financing needs, and at the top rates available on the market.

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