As many of us are aware, amendments to the Strata Property Act were passed late last month. These changes remove rental restrictions in strata properties along with most age restrictions, creating opportunities for investors looking to purchase a rental property. If you were thinking about investing in a rental property, now might be a great time to break into the market. Let’s take a look at the different ways that you can qualify.
How can you qualify?
Each lender will look at rental income differently in order to qualify you for your mortgage. However, there are three methods which are the most popular. A great benefit of working with a mortgage broker is that we know which methods each different lender uses and so can help to place you with the lender that will look upon your purchase the most favourably. Let’s take a look at three different methods of qualification.
1) Rental Inclusion
This is the most common method for purchasing residential investment properties with less than four units. It shows the percentage of your income that pays off debt and property expenses. Half of your forecasted rental income will be added to your gross income to qualify for this method. As a result, a lower ratio is better.
Lenders prefer your rental inclusion ratio to be below 32% to qualify for a mortgage.
= (Mortgage Payments + Property Tax + Heating Costs + Other Non-Real Estate Debt Payments)/ (Gross Income + 50% Forecasted Rental Income)
2) Rental Offset
This is another method used when assessing residential investment properties. Although less frequently used, it may help you if you can't qualify for a mortgage using the rental inclusion method. The theory behind the rental offset method is that your rental income will offset some of the costs of your property. This means that your gross income is less important because you will need to pay fewer expenses with your salary. For this method, a lower ratio is best because it shows less of your income will go towards paying for property maintenance costs.
The rental offset percentage ranges between 50% – 70% depending on your lender. For example, a 50% offset percentage means half your rental income pays property expenses.
Just as with the rental inclusion method, to qualify for a mortgage using this method, lenders prefer a rental offset ratio below 32%.
= [(Mortgage Payments + Property Tax + Heating Costs + Other Non-Real Estate Debt Payments) - (Rental Income * Rental Offset Percentage)]/ Gross Income
3) Debt Service Coverage Ratio (DSCR)
This metric is commonly used for commercial real estate mortgages, or in cases where your property has five or more units. The DSCR shows how many times your rental profits can pay off your mortgage payments. If your investment property has five or more units, your lender will likely use this ratio to assess you. A higher ratio is better because it shows you can make debt payments.
Mortgage lenders typically require your DSCR to be at least 1.10. However, higher ratios will help you to get better mortgage rates.
= (Net Operating Income) / Mortgage Payments
If you are thinking about purchasing a rental property, give us a call today! We have access to over 40 different lenders so we can be sure to go through every option in order to make your dream a reality.