Your monthly income plays a huge role in how much you can get when you apply for a mortgage. The higher your income, the more home you can afford and without a major promotion or taking a second job, it’s hard to increase your monthly earnings. But, if you decide to add an income suite in your new home, you can put that rental income towards the bank’s calculations – helping you qualify for a larger mortgage.
Learn more about whether a rental suite is the right choice for you.
Income, Expenses, and Mortgage Qualification
The bank decides how much money they’ll lend you by taking a look at your income and your expenses. They might look at the Gross Debt Service (GDS) ratio, which is calculated by adding up your housing-related costs (mortgage, interest, property taxes, and insurance) and figuring that as a percentage of your monthly income. Most banks want your GDS to be under 35 per cent.
They might also look at your Total Debt Service (TDS) ratio, which includes credit cards, student loans, and car loans in addition to the housing-related costs. These costs should be less than 42 per cent of your monthly income.
Adding an Income Suite Changes Your Ratios
If you have an income suite in your home, you get to add this income to the monthly income from your job. In the past, lenders would only count 50 per cent of the potential rental income when making calculations. Now, they allow you to use 100 per cent of the potential rental income to qualify for a mortgage.
For instance, if you earn $4,000 each month, you could potentially qualify for a mortgage requiring a total monthly payment of $1,400 (35 per cent of $4,000). With an extra $1,000 in rental income, you could qualify for a mortgage payment of $1,750 (35 per cent of $5,000).
The extra income makes it easier to afford your mortgage, and it can get you into a more expensive home. This is great news for both first-time home buyers and those looking to move into a bigger and nicer place.
Decrease Your Monthly Responsibility
Another way to look at it is in terms of decreasing your monthly mortgage responsibilities. Let’s say you’ve qualified for a home with a mortgage that costs $2,000. If there’s a rental suite you can let out for $800, you’ll only have to pay $1,200 each month.
What Does a Rental Suite Look Like?
It’s hard for some people to imagine renting part of their home out to someone else, and there are different scenarios that might work for different people. A single professional, for instance, might choose a townhome plan that has at least two bedrooms and two full bathrooms on the second floor, then find a roommate. They’d share the living space on the main floor, but each have their own bedrooms and bathrooms.
Some families might choose to finish the basement to include an in-law suite for an ageing parent. The parent pays some rent and lives in the basement suite. Basement designs work well for multi-generational families because the person in the basement suite usually has some access to the main home. You probably wouldn't want a complete stranger living in your basement suite.
Finally, some families are choosing laned homes with an above garage suite. This is a good way to maintain your privacy while still earning the income you need to qualify for the home you want.
The Downsides of Renting
When you act as a landlord, you’re responsible for any repair costs your tenant incurs. In a brand-new home, you don’t have to worry much about things breaking down, but you could have to deal with repairs if the tenant isn’t responsible and causes damage.
Income suites can be incredibly helpful for those who need a bit of a financial boost to qualify for the mortgage they want. A good builder will be happy to accommodate your income suite requests, so be sure to talk to them about what options will work best for you.