Mortgage Blog

Attention real estate investors!

As of May 01, 2023, most Alt-A lenders are making changes to their financing rules. They will be eliminating the “offset” method for the subject rental property and some will be restricting the number of properties that can be owned to 5-10 units (in most cases). If you're planning on purchasing or refinancing,  now is the time to act, before the rules get even more tighter. 

There are two ways that lenders can assist borrowers in qualifying for a mortgage when they have rental income.

The first method is called rental offset. It permits the borrower to subtract a portion of their rental income (usually between 50-80%) from their housing expenses. This is done to compute the Gross Debt Service (GDS) ratio, which is the amount of the borrower's income that is allocated towards paying for housing costs. The formula for GDS (with Rental Offset) is [PITH – (Rental Offset x Rental Income)] / Borrower’s Income.

The second method is called rental add-back. This approach adds a portion of the borrower's rental income (usually between 50-100%) to their income instead of deducting it from housing costs. The formula for GDS (with Rental Add-Back) is PITH / [Borrower’s Income + (Rental Add-Back x Rental Income)].

In Canada, the government revised mortgage financing regulations in 2010, replacing rental offset with rental add-back. Lenders now employ the 50%-90% add-back approach rather than the 80% offset approach.

As of May 01, 2023, most Alt-A lenders are eliminating the “offset” method for the subject rental property in question and some are also restricting the number of properties that can be owned to 5-10 units (in most cases).

For instance, let us assume that an investor has an annual income of $48,000 and owns a rental property worth $200,000 that rents for $1,250 per month. With a mortgage balance of $160,000, their PITH (principal, interest, taxes, and insurance) would be $955 per month.

If the investor employs the 80% rental offset approach, their GDS ratio would be -2.25%, indicating that their cash-flowing properties would improve their GDS ratio. However, with the 50% rental add-back approach, their GDS ratio would be 36.4%, making it difficult for them to qualify for mortgage financing if they wanted to purchase another property.

Call CoffeeandMortgage.ca TODAY for more information and insight to this ever-changing market!  We are here to help!

Kiruban Kana – Top 5% in Canada
Ex-Banker | Vice President & Mortgage Agent
C: 416-219-4820 | kiruban@coffeeandMortgage.ca

https://ovou.me/coffeeandmortgage

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