Buying a home, renting it all out, or just a portion of it

Buying a home, renting it all out, or just a portion of it

I have run into this question a few times, over the years, and decided that I should sit down and write about it.   When you purchase a home, as the mortgagor, you will come across some questions around whether the home you are buying is going to be your primary residence (you will be living there yourself) OR whether you have intentions of renting out ANY portion of the house.

1.  Is this your primary residence?

This question will be asked of you, at the mortgage application stage.  It is important to specify exactly what your intentions are with this new home you are buying.  If you are planning on renting out the home, you must state this.  Your answer will determine how your mortgage application is underwritten.  If you purchase a home and it will be your primary residence, you may purchase a home in Canada with a minimum down payment of 5%.  However, if you purchase a home and have intentions of renting it out, your down payment must now be 20% per Department of Finance new borrowing guidelines introduced on April 19, 2010.

The question will also be asked of you, at the lawyer’s office.  The lawyer will require you to sign a legal affidavit stating that this is your primary residence and it is not intended for use as a rental property.  If the client even hints that they will be renting out any portion of the house, the lawyer cannot and should not commission the affidavit.

2.  Is ANY PORTION of the house to be rented out?

This statement will appear in your mortgage commitment and applies if this is your primary residence.  You may be wondering why would it be a concern to my lender if I decide to just rent out a PORTION of my house?

Here is likely the most apparent reason why a lender would not allow this.  Should the mortgage go into default, how quickly can they (the lender) get a tenant out of the house, as opposed to the owner?  At one time, when someone was about to go into default, they might immediately sign a lease with a friend and then the mortgagee would have to go through a cumbersome process to evict them.   While it is now easier to evict a tenant, there is always concern about delays that might occur getting a tenant out.  Also, it is important to mention, that since the tenant does not own the home, they may not take the same care of the property, that an owner would.

In summary, some very important things to consider:

If you purchase a home, and you have indicated that it is your primary residence, the lawyer is instructed, by the lender, to prepare a legal affidavit stating that this is your primary residence and that you do not have intentions of renting out the home.   Remember that if the borrower even hints that they will be renting out any portion of the house, the lawyer CANNOT commission the affidavit.

Also remember that if this is your primary residence you should not even rent out a PORTION of your home UNLESS you have notified your lender.  If your lender finds out, EVEN IF you are not in default on any other provision, there will most certainly be a default coming if you do not disclose the new rental arrangement and the lender finds out.  You may be thinking, well how can the lender find out…….easier than you think.    A disgruntled neighbor, family member, or even worse, your tenant!  I recently met a mortgage applicant who shared their intention of reporting their current landlord for renting out an illegal basement apartment to them as a way of retaliating for raising the rent!   So a word of caution if you are thinking of doing this or even are in this situation now…..lenders can find out.

Be absolutely sure to disclose up front, to the bank, or your broker, exactly what your intentions are with the property at the time you are planning to buy, OR, if you make any changes to your plans after you move in.

This blog post was written by Elizabeth Blair on June 24, 2010.  Elizabeth is a Licensed Mortgage Agent with Mortgage Edge in Richmond Hill, Ontario.  Elizabeth services mortgage clients in Mississauga and all over the Greater Toronto area.

You can contact Elizabeth directly by phone at (905) 510-5785

by email at eblair@mortgageedge.ca

or you visit any of her websites at:

http://www.missmortgage.ca

http://www.burlington-mortgage.ca

http://www.oakville-mortgage.com

http://www.streetsville-mortgage.ca

Elizabeth is licensed with the Financial Services Commission of Ontario and is also a Member of IMBA (the Independent Mortgage Brokers Association of Ontario) www.imba.ca

Lic # M08005880 / Brokerage Lic # 10680

Head office is located at:  15 Wertheim Court, Suite 210, Richmond Hill, Ontario, Canada.