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home ownership strategies

A rental agreement document with keys and a pen.Ralf Kleemann/Getty Images/iStockphoto

When Sheilah and Vince Galati started looking for a new place to live last year, the North Vancouver, B.C., couple initially considered downsizing. With a young family, it wasn't that they needed less space. Rather, they wanted lower mortgage payments.

After seeing a few lower-priced homes that could be described politely as fixer-uppers, they happened to take a look at a character home. Situated within walking distance to the beach, shops and a neighbourhood pub, it was larger and more expensive than what they had in mind, but they fell in love with it. The home also had a legal two-bedroom suite that generates $1,500 a month in gross rental income. That sealed the deal.

"I'd been wanting to move for a while; the house we were in just wasn't quite the right house for us," Ms. Galati says. "I was thinking of downsizing so we could really get on top of our mortgage and pay it off quickly.

"When I saw this house, I could really imagine our family growing up there," adds the mother of two. "It's been life-changing. I feel it's made our lives so much better."

Despite mortgage rates being at historical lows, exorbitant housing prices in the Vancouver area mean buyers need to find ways to make a mortgage work. Many first-time buyers or those in a condo or townhouse wanting to move to a single-family home are seeking places that bring in rental income, whether it's a suite or sufficient space for student boarders.

Mortgage consultant Karen Gibbard of North Vancouver's Gibbard Group Financial says many buyers are wanting to "push the envelope" and borrow as much as they can for a bigger place, a newer home or a property in a better location. "Monthly payments don't seem to be the focus as much as what those monthly payments can buy," Ms. Gibbard says.

Erin Murray of Vancouver and her family take in one or two international students at a time in their 2,400-square-foot home, with each paying $850 a month. The family must provide a room with a desk for each boarder, as well as meals. They've had students stay anywhere from three weeks to five months, but friends have had stays as long as two years.

"This allows me to stay at home with the kids and still earn money," Ms. Murray says. "You have to account for groceries and declare the money for income taxes, but it's a way of supporting our income, and it's neat for the kids to learn about other cultures."

Although having boarders helps with the monthly expenses, it won't enable someone to qualify for a bigger mortgage, unlike a legal suite.

"Very often what I see is people moving from an apartment or a townhouse and thinking: I've got this townhouse worth $600,000 and I'd love to get into a home. … That's probably going to run around $900,000," says North Vancouver real-estate agent Paul Boenisch, who is with Sotheby's International Realty Canada. "That's a big jump. That's going to increase their cost about $1,400 a month, but if they've got a suite, that can happen.

"If you look at spending $200,000 more for a home, the cost to finance that, if we look at a 3-per-cent, five-year fixed [mortgage], to be conservative … that works out to $950 per month the mortgage would increase," he adds. "I see suites in more high-end homes that will rent for over $2,000 a month. That's significant. If somebody buys a big home – 4,000 square feet – they're happy to rent out a suite downstairs for $1,800 and cover $400,000 worth of financing."

Mr. Boenisch notes clients commonly ask if a home has a suite or whether one could be put in and at what cost. Besides rental income, an advantage of a suite is having a potential place for aging parents to live down the road. Plus, you can always reclaim the space as your own if you need or want it.

But being a landlord has its headaches."You're going to be sharing your living space, and a lot of people don't want to do that," Mr. Boenisch notes.

Although mortgage-helpers can help make a larger house more affordable or enable people to get out of a strata property and into a home, Ms. Gibbard says buyers need to be cautious.

"With new rules in place by the lenders and high-ratio insurance companies, it makes the qualification a little trickier than what it appears on first blush," she says. "Lenders simply don't allow full use of the rental income for qualification purposes.

"For budgeting purposes, people tend to subtract the full amount of the rental income off the mortgage payments," she adds. "In reality, lenders and high-ratio insurance companies don't allow the use of 100 per cent of the rental income for qualification purposes and, in a lot of cases, require the basement suite to be legal and registered with the municipality."

If someone buys a property with a 5-per-cent down payment and has a legal basement suite that would rent for $1,000 a month, the lender or high-ratio insurance company would allow up to 50 per cent of the rental income to be added to the client's income for qualification purposes; in this case, $500.

"The traditional qualification calculation allows a client to borrow up to 35 per cent of their income for housing costs," Ms. Gibbard explains. "In this example, this means that a client is allowed to use 35 per cent of the $500, which translates into the client's $1,000 per month rental income becoming $175 per month worth of income for qualification purposes. Right now, $175 per month covers payments on a $37,000 mortgage based on a 2.99-per-cent rate and a 25-year amortization."

Buying a bigger or better home now at a low interest rate is one thing. Being able to carry that mortgage should rates rise is another.

That was one factor Jody Butler made sure she and her husband considered when they bought a newer home in Vancouver a few years ago. They moved from a 1,350-square-foot townhouse to a 2,000-square-foot home with a 650-square-foot, two-bedroom suite that they rent out for $1,200 a month. They refinanced their mortgage at a lower rate, no longer have a monthly strata fee of $300, and are paying less now than they did before. They're also able to put money into registered retirement savings plans, registered education savings plan for their young child and travel.

"You might have a great rate now, but are you going to be able to afford it if rates go up?" Ms. Butler says. "If you're living that close to the edge where you can't afford a percentage of an increase, you might want to rethink it. And what if there's a downturn in the rental market? Can you go those couple of months without the suite rented out? You don't want to have to be paycheque to paycheque. … We made sure we weren't going to be house poor.

"If you rent out a suite, you have to remember it's gross income," she adds. "You have to declare it as income and you end up paying 25-per-cent tax on it. Property transfer tax can be huge, too; that's another thing you have to think of if you're coming from a condo or townhouse."

Like the Butlers, the Galatis have found that the move to a bigger, better place with a suite from their ho-hum 1970s home has allowed them to focus on other financial areas.

"We've been able to give ourselves a cushion for any updates we need doing," Ms. Galati says. "We have money in the bank now for repairs, where before we were owing money. We're not scrambling for cash. I feel like we have more breathing room now."