May 1, 2017
How a Rental Income Suite Can Help Pay Your Mortgage Faster
Owning real estate can be a great way to build equity and put your money to work – not to mention the benefits of having a roof over your head. But if you’re an aspiring buyer within Ontario’s Golden Horseshoe region – and particularly in the Greater Toronto Area market, where home prices have appreciated 33% year over year – finding your financial foothold on the real estate ladder seems increasingly challenging.
Then, once you’re in the market, there are other costs – property taxes, utilities and a monthly mortgage – to contend with.
The good news: Buyers do have some tools to help offset the costs of carrying a mortgage. Renting out a portion of your home, for example, can put you on the fast-track to being mortgage-free.
Generate Extra Cash with a Rental Suite
Rental income can help reduce the size of your monthly mortgage payment. With those savings, you could commit to paying down your mortgage faster, or even increase your real estate investment and upgrade your home.
Purchasing a home with an income suite already built in can also make it easier to qualify for a mortgage; the Canada Mortgage and Housing Corporation (CMHC) recently made it possible to allow 100 per cent of gross rental income from a two-unit owner-occupied property that is the subject of a loan submitted for insurance.
In order to qualify, the income suite must have a separate entrance and its own sleeping, living and kitchen areas. Laundry facilities, hallways and parking areas can be shared, however. The suite must also be up to legal secondary suite code in your province.
Related Read: Building a Legal Suite in Toronto? Beware Hidden Fees
How Much Can You Earn With a Rental Income Suite?
While the amount you can expect to earn from your income suite depends on many variables, such as location, its condition, and your local rental market, let’s assume the following:
- You and your buying partner earn an annual household income of $100,000 before taxes.
- You can make a down payment of $50,000, meaning you’ll qualify to purchase a home priced at $518,888.
- You have a mortgage rate of 2.29%, a five-year, fixed-rate mortgage, and a total amortization period of 25 years.
If you can rent your income suite for $1,000 monthly, your total annual income will increase to $112,000. That bumps up your mortgage qualification amount to $571,341 – an increase of $53,453! At that amount, you’ll then carry a mortgage of $2,377. Now, if you apply all of the rent you collect to the mortgage, that amount is reduced to $1,377 – an additional 42% of the mortgage every month.
Use Rental Income to Pay Your Mortgage Faster
Another great use for your rental funds is to make a lump sum payment toward your mortgage. Depending on your mortgage product, you may be able to amp up your monthly payment by up to an additional 20%, or make a once-per-year lump sum payment. This effectively whittles down the total mortgage amount, helping you pay it off faster, and slashing the amount of interest you’ll owe. For example, if you make an annual lump sum payment of $12,000, you’ll save $66,658 in interest and will pay your mortgage off nine years faster!
Be Aware of Local Building Rules
If your home doesn’t already come equipped with an income suite, it may worth the investment to build one. However, it’s important to weigh the cost of building a suite with the potential income you may earn from it. For example, if the upgrades will only cost $25,000, and you think you can charge at least $1,000 in monthly rent, your renovation will pay for itself after two years.
If the construction to build a suite will be substantial, however – let’s say it’ll cost $70,000, and you only expect to charge $750 in rent – that’s a much longer payoff horizon. If you need to sell your home prior to that, it could be too early to realize the return on your investment.
Depending on where you live, there could be regulations and bylaws that could restrict where and how you build your income suite. Make sure you check with municipality and get the proper building permits before proceeding with any work.
Finally, prepare for your new role as a landlord! There are many renter rights and responsibilities you’ll need to familiarize yourself with before taking on your first tenant.Reviewing your province’s Residential Tenancy Act, creating a business plan, and understanding how to file taxes on your rental income are just some of the initial steps you’ll need to take.