Buying a duplex and living in one unit is treated very differently from buying a condo only to rent it out. If you live in the property, you may be able to put as little as 5% down. If you don’t, you normally need at least 20%. The rules on rental income also change, depending on who lives in the property and how many units it has.
Minimum down payment by property type
| Property | Minimum down payment | Notes |
|---|---|---|
| Owner-occupied, 1 or 2 units | 5% of the first $500,000 + 10% of the rest | Insured; price below $1.5 million. You live in one unit and can rent the other. |
| Owner-occupied, 3 or 4 units | 10% | Insured; price below $1.5 million. You live in one unit. |
| Non-owner-occupied, 1 unit | 20% | Not eligible for CMHC insurance. Uninsured mortgage from a lender. |
| Non-owner-occupied, 2 to 4 units | 20% | Uninsured, or CMHC Income Property insurance if the value is below $1 million. |
| Any home of $1.5 million or more | 20% | Insured homeowner mortgages are only available below $1.5 million. |
Federally regulated lenders must insure a residential mortgage if the loan-to-value ratio is above 80%, which is why 20% is the normal minimum for a home you won’t live in. Lenders can ask for more for a rental. Interest rates can also be different, so check with your lender.
CMHC Income Property
This CMHC product is for non-owner-occupied rental properties with 2 to 4 units. It is available to citizens and permanent residents, with up to 80% loan-to-value and a value below $1 million. The maximum amortization is 25 years. It has its own premiums: 1.45% up to 65% loan-to-value, 2.00% from 65.01% to 75%, and 2.90% from 75.01% to 80%. You must also meet the 39% GDS and 44% TDS limits at the stress-test rate.
Second homes and vacation properties
A second home that you or your family use is not the same as a rental property. Sagen and Canada Guaranty both insure second homes with as little as 5% down, but with limits:
- The property must be occupied by you or an immediate family member. Canada Guaranty’s program allows one unit only.
- Rental and investment properties are not eligible.
- For Sagen’s Type B vacation homes, the maximum loan-to-value is 90% and all applicants need a credit score of 680.
- Canada Guaranty requires your TDS to include the costs of both properties.
Do not describe a planned rental as a second home on your application. Lenders are expected to watch for misrepresentation and report it to the insurer.
How rental income is counted
Rental income helps you qualify only as far as your lender and insurer allow. CMHC publishes these approaches for properties that are the subject of an insured application:
| Property | CMHC approach |
|---|---|
| Owner-occupied, 2 units | Up to 100% of gross rent |
| Owner-occupied, 3 or 4 units | Up to 50% of gross rent, or net rental income |
| Non-owner-occupied, 2 to 4 units | Up to 50% of gross rent, or net rental income |
- Gross rent approach. The percentage of rent is added to your annual income, and CMHC says that taxes and heat for the property may be excluded from the ratios.
- Net approach. Net rent means gross rent minus operating expenses. It is added to your income, or deducted if it is negative. CMHC says this approach is not likely to be used for a property that is the subject of the application.
- Rental properties you already own. When a non-owner-occupied rental is not part of the application, CMHC uses the net approach.
Uninsured lenders set their own rules, and they differ. OSFI’s Guideline B-20 tells lenders to use rigorous due diligence on loans that depend on income from the property. Foreign rental income is excluded by Sagen and Canada Guaranty in their newcomer programs. See foreign income and foreign assets.
Worked example 1: live in one unit of a duplex
Sara earns $150,000. She wants a $700,000 duplex and will live in one unit and rent the other for $1,800 a month ($21,600 a year). Property tax is $5,400 a year and heating is $150 a month. Her rate is 4.49% (6.49% to qualify) over 25 years.
- Minimum down payment: 5% of $500,000 + 10% of $200,000 = $45,000.
- Mortgage of $655,000 plus a 4.00% premium of $26,200 = $681,200.
- Actual payment: about $3,766 a month. Qualifying payment: $4,559 a month.
| Rental income counted | Income used | GDS (limit 39%) |
|---|---|---|
| None | $150,000 | 41.3%: does not pass |
| 50% of rent | $160,800 | 38.5%: passes |
| 100% of rent | $171,600 | 36.1%: passes |
We kept tax and heat in the ratio to be cautious, although CMHC says they may be excluded. Your GDS and TDS result will depend on your lender’s method.
Worked example 2: a condo to rent out
Tom earns $150,000 and already owns his home, which costs $2,600 a month for the mortgage, tax and heat. He wants a $500,000 condo to rent for $2,400 a month. Property tax is $3,000 a year, condo fees are $450 a month and heating is $100 a month.
- Minimum down payment: 20% = $100,000. The mortgage is $400,000, with no premium.
- Actual payment: about $2,212 a month. Qualifying payment: $2,677 a month.
- Counting his home’s $2,600 as a debt, TDS without rent is 46.8%, above 44%.
- If the lender adds 50% of the rent ($14,400 a year), TDS falls to 42.7%. This is an assumption: ask each lender how it counts rent.
Now look at the cash each month: $2,400 rent − $2,212 mortgage − $250 property tax − $450 condo fees = −$512, before insurance, repairs and empty months. Part of the mortgage payment repays principal, but Tom must still pay that money every month. A rental that helps you qualify can still cost you money.
Tax on rental income
You must report rental income, usually on CRA Form T776. You report your share if you co-own the property. Mortgage interest on a rental can be deducted, but repayments of principal cannot. Selling a rental property can also have tax effects, so ask a tax professional.
Next steps
Test your numbers with the stress test calculator and affordability calculator, and budget for closing costs. If you plan to use money from your existing home, read refinancing. Before you buy, ask a lender or broker for a written pre-approval that names the property type and how rent is counted. If you aren’t a citizen or permanent resident, read buying on a work or study permit first, because CMHC Income Property is not listed for you.
Sources: CMHC, homeowner loan limits by unit count; CMHC Income Property; CMHC, rental income; OSFI, Guideline B-20; Sagen, vacation and secondary homes; Canada Guaranty, Lifestyle Advantage; CRA, rental income. All payments and ratios were calculated with this site’s mortgage engine.