Less Helpful Mortgage Helpers: $43K Income; Old Rules $460K Mortgage; New Rules $230K Mortgage

Ed at vancouvercondo.info 27 Mar 2010 12:53 am asks “Is it just me or is this going to destroy the real estate market overnight?”, referencing this video describing one aspect of the new rules, those applying to how income from a ‘mortgage helper’ suite is applied in qualifying for a mortgage. No, Ed, it’s not just you. It is going to be interesting to observe how all these nudges towards tightening – Flaherty’s light taps on the brakes –  are going to affect a market that just may be teetering on a precipice.-vreaa

Kelowna mortgage broker Lewis MacDonald deserves a plug for walking us through the implication of the new rules:

[This is going to have an even bigger effect than this video implies because the kind of property that the $43K income individual now qualifies for is unlikely to have a $1,000 per month rental suite, or any rental suite. -vreaa]

12 responses to “Less Helpful Mortgage Helpers: $43K Income; Old Rules $460K Mortgage; New Rules $230K Mortgage

  1. This will change the game for a lot of people, and it should drain a lot of demand away from SFH markets accross the country. I think this is a good move overall. There will always be people who will max themselves out. When you allow the “old system” to happen, you have lower income individuals or couples who shouldn’t be able to afford a property but are willing to max themselves out competing with the “normal market” for SFH’s (i.e. young families) which causes prices to go up (not values) and families to move elsewhere. Neither are good.

  2. This is a great explanation. I missed this little tidbit in the CMHC release. I love his little facial wince at the end (watch for it).

    Note this is only with CMHC approved loans. Lenders can do whatever they want if the mortgage does not need CMHC insurance. I wonder if the ratings agencies might start looking into MBSs a bit more carefully after April. Details like this are the kinds of things ratings agencies missed in the US a few years back.

  3. An important point is that this rule only applies to LEGAL suites.

    The 43K income was only an example. The same absolute difference will translate to any income. So someone who buys a $600K house with a legal suite with <20% down will be SOL.

  4. Just wondering, does anyone know if renting out an extra bedroom in a condo counts as a suite?

    Like if I buy a 2 bedroom and take on a roommate, does the rent he pays me work in the same way as a suite does as far as qualifying for a mortgage?

    Another interesting thought, will this have any effect on rents? Untill the new rule came in it was very benificial to have a rental suite, so many people did it which may have helped keep rents lower. With these new rules it is hardly worth the effort to have a rental suite if your aim is to qualify for a higher mortgage with it.

    Is it possible this will reduce the number of suites because less people think it is worth it?

  5. Another question: How many owners will be in trouble with this new rule come mortgage renewal?
    A fair number, one would guess, given the popularity of ‘mortgage helpers’ in recent years.

  6. vreaa, I’m guessing the qualifications are grandfathered into the life of the loan on a specific property. Again, it’s only legal suites, not semi-legal/illegal that matter with CMHC.

    davers, I don’t think they look at flatmates or boarders.

  7. Philip Tagalog

    Under the new rules, I fail to see how a shortfall of $6,000 in qualifying annual income can reduce the approved CMHC mortgage in half to 230,000.

  8. jesse -> When you say ‘life of the loan’, do you mean the ‘term’ (eg 3 years, 5 years, etc) or the ‘amortization period’ (eg 25 years, 35 years).
    My understanding is that the mortgage has to be renegotiated at the end of the term, and that the new qualification rules will apply. This could mean potential problems for many who have qualified under lax guidelines and are soon going to be renegotiating.

  9. Philip -> Take another look at the video.
    It seems the changes constitute not just a reduction in the percentage of rental income applied, but also HOW exactly rental income will be applied.
    If we believe this video, rental income can no longer simply be subtracted from the monthly mortgage payment, but is rather added to personal income, which makes a big difference.

  10. Jesse, are you sure that this only applies to legal suites? I have had two properties with illegal suites and the banks absolutely took into account the rent when considering the mortgage.

    When do these new rules take effect?

  11. I don’t necessarily think this is a bad thing – being approved for a $460K mortgage with a $43K income is more than 10x income.

  12. FTBer -> Even $230K (5.3 times income), is well above the historic norm (3.7).
    You’re right the tightening “isn’t a bad thing”.

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