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Can I rent my house out on a normal mortgage in Canada?

by Emma Scott on 14 May 2021

Maybe you need help with your mortgage payments, property taxes, or want some extra cash flow, whatever the reason is, you're considering renting out your home. We will provide some important information and helpful tips for renting your home. From buying to selling, we have you covered.

Make sure you have the right mortgage

When you bought your home, it is likely that you signed on with your lender that you, the owner, were going to occupy the residence. This is great for wanting to live there, but it could cause some issues with your lender if you vacate your home to rent it out.

Owner-occupied mortgages & properties

If you have a part of your home that you would like to lease - like a carriage house, room, or basement - and you would still be living on the property, your investment property is deemed owner-occupied. This means that the owner lives on-site alongside their tenants. This type of rental property is deemed the best by mortgage lenders.

Non-owner occupied mortgages & properties

A rental property that is not occupied by the landlord is deemed non-owner occupied. Because these investment properties are not the owner's primary residence, mortgage lenders may require buyers to take out a commercial mortgage.

A commercial mortgage can be much more expensive than a typical mortgage. Instead of paying a 5% down payment, borrowers wanting to purchase an investment property need to pay 20% of their rental properties' costs upfront. This could be feasible for some, but in most circumstances, this may not be possible for many people.

right mortgage

Knowing your home mortgage rules

Earning rental income to help pay off your mortgage seems like a great idea to many. What's the harm in renting out your home or basement for a short period of time? You may think there is no difference between you living in the place and renting it to some tenants for part of the time. Although you may see it this way, your lender may not.

While there are many pros to renting your home, there can be many downsides. Canadian homeowners who are wanting to lease their property should be aware of the tax implications and the impact it could have on their mortgage contract.

Do you need to tell your mortgage lender?

If you have a pre-existing mortgage and have taken on tenants, there is a chance that you could be breaking your mortgage contract without even knowing.

Depending on your loan type, you may be allowed to rent out your property without any complications with your lender. But, there are some lenders that write a condition into their mortgage agreements stating that a home must be owner-occupied. This is typically mortgage insurance for lenders, protecting them in case the owner defaults on their mortgage payments.

Anyone considering entering the rental market should confirm their mortgage type before making a decision. It is a great idea to check with your lender before you begin renting your home.

Don't lie to your lender

Not knowing to tell your lender about renting is one thing, lying to them is another thing altogether. If a borrower does not disclose that they are renting to tenants they could be committing occupancy or mortgage fraud.

There could be serious implications if your lender discovers that you are lying about the use of your home. Your ability to get a new mortgage or renew your current mortgage may be seriously impacted. Or worse, you could have your mortgage cancelled altogether.

borrower and lender

Selling a home you used as a rental property

Capital Gains Tax

If there is a chance you may want to sell your house in the future, you may be wondering what are the implications of selling a property that was once leased. It is important to know this information ahead of time to save yourself from any surprises - or extra costs.

Capital gains tax is the tax that incurs on properties that increase in value. Any property owner needs to pay this tax when they sell a property that has increased in value. This tax can be incurred on rental investments, commercial businesses, and other properties.

Landlords with several rentals will need to pay tax on half of the profit earned in their investment properties. This will only be at a marginal rate, but it is an extra expense to keep in mind.

Thankfully, principal residences are excluded from paying this tax. This means that if your rental unit resides in your personal house, you do not need to worry about paying extra taxes. This is very beneficial for people who want to rent out a portion of their home.

What you need to know as a landlord

Find the right price

Contact a real estate broker or agent to visit your home and determine appropriate rates for your rentals. Because it's their job to be familiar with rental prices in your area, as well as the housing market, they can give you an accurate estimate for your rental rates.

What type of insurance you need

Whether it is your home or a rental property, a property manager will want to protect their investment against any possible damage or losses. It is important to know what type of insurance coverage is applicable to your rental property.

type of insurance

Homeowner's insurance is not applicable to a rental property that the landlords are not residing in. A unit that is only occupied by a tenant can only be insured with landlord's insurance. This condition is actually quite helpful to landlords because landlord's insurance offers rental default in case their home becomes uninhabitable. This cuts back on any extra expenses while you search for a new tenant.

Homeowners’ insurance will cover any damages and loss in a home that the mortgage owner resides in. Despite this, a landlord should still encourage renters to purchase tenant insurance to protect their own belongings.

Create a written lease

There are two types of lease agreements: verbal and written. It is strongly recommended that you create a written lease agreement to ensure that both you and your renter are on the same page. This lease may also be helpful if any disputes arise in the future.

A written lease should include information on the start and end dates of your lease, the dollar value that rent will cost each month, the involved parties, what is included and not included, and if there are any other conditions (e.g., can the renter have any pets in the rental unit). This contract is one of the most important pieces of documentation for a landlord and their tenant.

You can qualify for a new house easier

Buying a house with the goal to live in it and rent a portion of it out will not impact your loan application whatsoever. In fact, it can even boost their chances of qualifying for a better loan.

Buyers interested in buying and renting out a portion of their house only need to put down 5% of the asking price at the point they buy their property. This is great for anyone seeking a new home.

A portion of the rental income (usually 50%) generated from the rental property can be added to your general income, allowing you to qualify for a more expensive home and mortgage loan than you typically would be able to afford. This is a great option for buyers who are having a difficult time affording a house they would like in Canada's booming real estate market.

rent out your house

So, should you rent out your house?

The decision to rent out your property should nott be something taken lightly. Being a landlord is a big responsibility. There are many rules that you need to abide by in order to rent out a room, basement suite, room, or even your entire house.

Consider reviewing your mortgage rules with your lender before you rent out your house to any tenants. This will be important to determine whether your rental situation will abide by your home loan regulations.

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