The Actual ‘Inside Scoop’ on CMHC Secondary Suites –
And what it means to investors and home buyers!
On July 23rd of 2015, CMHC announced changes to its policies regarding the treatment of rental income for borrower qualification purposes. There seemed to be a lot of confusion about the exact details so I reached out to my senior CMHC contacts to get the facts and inside scoop. The facts in this article are entirely correct and will be the basis for the CMHC Secondary Suite program from September 28, 2015 onward.
First, let’s keep in mind that affordable and quality housing is a key priority for CMHC and in my opinion, CMHC is the single best source for non-biased housing data in the country. So, here are the facts for your reference and planning:
In the words of CMHC: “Secondary rental suites are recognized as a source of affordable housing that effectively meet the evolving needs of Canadians. As a result of a recent review, CMHC is modifying its policies related to treatment of rental income for 2-unit owner-occupied properties subject to a loan application submitted for insurance.”
By enhancing the affordability of homes containing secondary suites, CMHC is simply ensuring its policies continue to facilitate a range of housing options for Canadians while aligning with the needs of an evolving market. More specifically, this addresses the need for:
– a growing trend towards multigenerational housing and
– Supporting the needs of an aging and diverse population.
Sound policy aside, I know that my readers are most concerned with the math and the opportunity so here are the highlights of CMHC’s new policy on the Treatment of Rental Income for Borrower Qualification Purposes – Homeowner (1-4 units).
Effective September 28, 2015:
- For owner-occupied properties that are subject to a loan application submitted for mortgage loan insurance, CMHC currently considers up to 50% of gross rental income in the total qualifying income for the borrower.
- For 2-unit owner-occupied properties subject to the loan application, CMHC will now consider up to 100% of gross rental providing specific conditions are met.
Additional conditions when more than 50 % (up to 100%) of gross rental income is used for borrower qualification purposes include:
– The income must have been sustained for a period of at least two years.
– The income amount must not exceed the average of the last two years so as to address income fluctuations, smooth out cyclical trends and unexpected events such as vacancies.
– Prospective borrowers must demonstrate a strong history of managing credit (with an expected minimum credit score of 680).
Benefits of secondary rental suites:
1. They provide a viable source of affordable housing offered at a cost that is often lower than those of apartments in purpose built rental buildings.
2. They have been recognized by policy makers as one of the most cost-effective ways of providing affordable rental housing and are an important part of the Canadian housing stock.
3. They can provide the needed extra income to homebuyers for whom the additional income makes housing more affordable.
4. Many municipalities across Canada have recently reviewed, or are in the process of reviewing, their bylaws and standards governing secondary suites in order to assess whether they can be relaxed, which has led to an increased number of municipalities permitting secondary suites in recent years. Some municipalities permit secondary suites “as of right” in all single-detached dwellings, while others permit them only in designated zones.
5. In other cases, municipalities permit secondary suites through site-specific rezoning. Secondary suites are governed by provincial or territorial building codes that deal with health, safety and fire protection. Often, a flexible approach using equivalencies in building codes or an incentive/grant program is necessary to encourage owners to make their suites legal.
The fact is that this program will encourage investors to bring their suites up to code, make them legal, and thus increase the property values. Homebuyers with these units will now be better able to afford to purchase in the major metropolitan centres where housing affordability has become a major concern. This is great initiative and it fills both a major need and a growing market demand. Expect to see the re-birth of secondary suites in the major cities growing … it will be good for the quality of secondary suites and both the housing market and consumers alike. Well done, CMHC!