Qualifying for a mortgage can be tough. Lenders will look at your income, credit score, and debt ratios to determine whether or not you are eligible. Luckily, you can boost your application by including income sources beyond your salary. Through the use of alternative lenders, more and more Canadian homeowners are using their rental income and local market rent towards their mortgage applications.
What is Market Rent?
Market rent is a value typically set by the CMHC (Canadian Mortgage and House Corporation) to represent the average rate of rent charged across a particular area or region. This figure represents the amount renters are willing to pay for similar properties in the area.
It is very difficult to determine a general market rent for all of Canada, so you will need to consult sources specific to your current city and area. For instance, the CMHC publishes an average rate for the City of Toronto, which is projected to increase by 2.5% in 2023. Landlords are not permitted to raise rents by more than the projected rate.
How is Market Rent Calculated?
Market rent can be calculated in a few different ways, depending on the property type in question. Market rents are calculated on a square foot basis for commercial properties, accounting for location premiums. For residential properties, market rents are calculated based on amenities (bedrooms, bathrooms, etc.) as well as average monthly payments.
Income Sources for Your Mortgage
When applying for a mortgage, your lender will evaluate your income to determine how much risk you pose as a borrower. The greater your income, the more confident your lender can be that you will not default on your mortgage and will make your payments on time.
Usually, borrowers will provide their lenders with a two-year employment history, including tax filings and pay stubs as proof of their salary. Having a long-term, paid position with your employer makes qualifying for a mortgage easier—but it is not necessary. These days, salary is not the only source of income considered in your application. Here are some other income types you can include:
Proving your income history can be difficult when you are self-employed. If you have a longer history of self-employed income, you may be able to prove it through your tax filings or income statements.
Many self-employed Canadians take full advantage of tax benefits by paying themselves a low salary or claiming as many expenses as possible. While this strategy may be helpful from a tax perspective, it makes it difficult for your lender to gauge your income. Given these circumstances, you may need to prepare a larger down payment than most applicants.
If you are just starting, you may run into lenders who do not recognize your self-employed income. Luckily, we work with a vast network of 50+ lenders, including some who specialize in self-employed applicants.
In some fields, you may receive variable income sources (e.g., bonuses, commissions, tips) on top of your traditional salary. In other fields, you might be receiving no salary at all. These income sources can help you pay off your mortgage, but they can sometimes be hard to quantify. You may have received a 20% bonus last year, but it isn't easy to prove that you will receive one this year or in years to follow.
In most cases, lenders will count bonuses or commissions that have been relatively stable over the past 2+ years, but they will be somewhat discounted to account for the risk. Conversely, tips do not appear on your tax statements and are rarely considered.
If you are receiving child support or alimony payments, you can often count that as a source of income in your mortgage application. Most Canadian lenders will recognize child support payments as a stable source of income, so long as you can prove a history of consistent payments. In order to include child support in your income calculation, your lender will require proof of past payments as well as a notice of legal separation between you and your partner.
On the other hand, if you are the partner paying child support, the value of these payments will be deducted from your income when applying for a mortgage. It is important to take this into account when planning for your loan.
Pension or Disability Benefits
If you are receiving money from your pension on a regular basis, you can certainly include it as income in your mortgage application. The Canadian Pension Plan (CPP) also offers disability benefits on a monthly basis. These payments are also acceptable forms of income and will be counted by your lender.
Traditional Rental Income
If you have a rental property generating profit, you may be able to count your gains as income when applying for a mortgage. As of 2015, the Canadian Mortgage and Housing Corporation (CMHC) has allowed Canadians to consider 100% of their rental income when applying for a new mortgage. However, these rules only apply to homeowners renting out their residence on a small scale. In order to qualify for rental income perks, your property must meet the following requirements:
- You must be currently living in the property
- The property cannot have more than two units (one unit that you are living in and a second that you are renting out)
- The rental unit must have already been occupied for two years
- The property and units meet all zoning requirements
- The rental unit has its own entrance and is freestanding
- You, the owner, must have a strong history of loan repayments
If you are a real estate investor looking to rent out multiple residential properties, you unfortunately cannot take advantage of the CMHC perks. You can, however, capitalize on a number of tax benefits. For more information, check out our blog post on rental property mortgages.
Market Rental Rates
While the CMHC may have strict guidelines regarding rental income, we work with a number of lenders who have much looser regulations. In many cases, you may be able to count rental income towards your mortgage application even if you have not yet begun renting your property.
Your lender will include a percentage of market rent under your income, even if you are currently renting at a price below market value (e.g. market rent is approximately $3000 a month but you are only charging $2500 or have not begun charging rent at all). By including a portion of the market rent in your application, you may be eligible for a larger mortgage with better terms.
How to Improve Your Chances of Getting a Mortgage
If you are looking to improve your chances of getting a mortgage, there are a few things you can do. If you are looking to increase your income through renting, you may want to look into renovating your home to support a second unit. Because housing is a valuable asset for most Canadian cities, several municipal and provincial grants can help support the cost of rental-related renovations. Our Clover Mortgage team can also help connect you to a wide range of lenders who will recognize and accept different forms of rental income.
Besides looking into rental properties, you can also improve your chances by preparing other parts of your application. Ensure you have a good credit score, a solid debt repayment history, and a complete application. You can also increase your odds of mortgage approval by making a larger down payment. For more information on how to nail your mortgage application, check out our guides on obtaining a mortgage in 2022, making a down payment, and improving your credit score.
Of course, the best way to improve your odds of getting a mortgage is to consult mortgage specialists like Clover Mortgage. We have experience working with a vast and diverse network of lenders and can connect you to the perfect mortgage for your unique needs. To book your free consultation, contact Clover Mortgage today!