What You Need to Know Before Renting Out a Home with an Owner-Occupied Mortgage in Canada

Renting out a home with an owner-occupied mortgage in Canada is more challenging than it may seem. Several legal requirements must be met before you can rent such property.

First, you must ensure that your mortgage lender has permitted the rental agreement. Generally speaking, lenders will only allow owner-occupied mortgages to be used for residential purposes, not commercial or investment purposes. Moreover, you will also need to ensure that the terms of your mortgage do not prohibit renting out the property.

When you check out this list of mortgage rates, you’ll notice different lenders have different rates; as such, it is important to check with the lender if those rates are subject to change if you rent out space in your home.

Exploring the renting restrictions

There are restrictions on how much of the house can be rented out when taking out an owner-occupied mortgage in Canada.

Generally speaking, lenders will only allow up to 20% of the total living space to be rented out. It means that if you have a four-bedroom home, you can rent out one bedroom and still qualify for an owner-occupied mortgage. However, it is important to note that some lenders may have stricter rules and not allow rental activity.

It is also important to remember that even if you meet the lender’s requirements for renting out part of your home, your mortgage will only automatically be approved. The lender must still assess your financial situation and creditworthiness before approving or denying your application.

How does renting affect insurance coverage or premiums?

Having tenants living in a house with an owner-occupied mortgage can affect insurance coverage and premiums in Canada.

Your insurer may require additional coverage for tenant-occupied properties depending on your policy type. This is because tenants are more likely to cause damage to the property than owners who live there full-time.

Additionally, some insurers may charge higher premiums for tenant-occupied properties due to increased risk. It’s essential to speak with your insurer about any changes that need to be made to your policy if you plan on renting out part or all of your home.

The eligibility requirements

To be eligible for an owner-occupied mortgage in Canada, you must meet certain criteria:

1. You must be a Canadian citizen or a permanent resident of Canada. You must also have a good credit score and a steady source of income.
2. You must have enough money to cover your home purchase’s down payment and closing costs.
3. You must demonstrate that you can afford to make regular payments on the mortgage loan over its term.

Identifying the best lender

Canada’s owner-occupied mortgage market is competitive, so finding the proper lender is essential. You should start by comparing the rates given by various loan providers.

Fixed-rate and adjustable-rate mortgages have different interest rates, so it’s best to shop around and see what you can get. The costs of getting a mortgage from each financial institution should also be considered. Application fees, appraisal charges and closing expenses are a few examples.

Finally, before deciding on a mortgage lender, it’s a good idea to check reviews written by clients who have already worked with that lender.

Locating reliable renters

Despite housing prices in Canada going down in recent years, many Canadians have given up on owning a home, viewing it as something reserved for the rich. As such, many still choose to live in rental houses. 

As a homeowner, especially one with an owner-occupied mortgage, it is crucial to identify reliable renters when renting out your property. The best method for doing this is to perform exhaustive checks on all prospective renters. They need to have their identification, rental and job histories checked. Landlords should also check prior landlord and job references.

A documented lease agreement detailing the tenancy conditions and relevant laws or regulations is also crucial. It is also the responsibility of landlords to be familiar with their legal protections and obligations under provincial tenant law. You should also learn how to collect unpaid rent if the tenants are not paying on time. A detailed contract and agreement will be helpful in these situations.

Navigating Canadian tax laws

Understanding the tax ramifications of renting out a home in Canada with an owner-occupied mortgage is vital.

The first thing to consider is whether the IRS will classify you as a landlord. If so, you might qualify for tax breaks if you have rental income. Repair and maintenance charges, insurance premiums, property taxes and mortgage interest may all be deductible from your taxable income.

It’s also worth noting that there are limitations on how much may be charged in rent compared to the mortgage payment. In most cases, your rent should be at most 25% of your mortgage payment.

In summary, renting out a property in Canada while still paying off an owner-occupied mortgage requires careful investigation and familiarity with the relevant rules and regulations. Finding a reliable renter, insurance, taxes and the consequences of breaking the rules are just a few considerations that must be made.