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There are various ways how rental income can be included in debt service calculation. The major Canadian mortgage insurers generally adapt to two methods.

  • Rental offset

  • Rental income

Rental offset:

Rental offset calculation method takes care of the rental expense minus rental income before it gets added to the perpetual debt.

As a simple example, the principal and the interest is calculated on the rental mortgage then taxes, heating and condo fees are added. After that a percentage of rental income is deducted from the total expense. The reminder or the balance is added to the debt.

The Total Debt Ratio for rental offset will be calculated as:

Principle + Interest + Tax + Heat + Monthly Obligations1 – (Rental Income x 80%)
Gross Annual Income
CMHC stopped offering rental offset in 2010. Other two mortgage default insurers – Genworth Canada and Canada Guaranty are still offering rental offset calculation.

Till now Genworth and Canada Guaranty where allowing 80% of the rental income offset in the gross debt ratio calculation.

Recently Canada Guaranty announced that it will no longer be offering 80% rental offset option. It has made changes to its criteria of how income from non-owner-occupied subject rental properties and owner-occupied subject properties with income suites are calculated.

Rental income:

 In rental Income the debt ratio is calculated as:

Principle + Interest + Tax 2 + Heat 2 + Monthly Obligations1
Gross Annual Income + (Rental Income x 50%)

In the case of rental income, as the name suggests, 50% or a fixed percentage of the gross rental income is added to the borrower’s gross annual income.

CMHC excludes2 taxes and heating for the owner-occupied rental property from the income. For the non-owner-occupied rental properties, that are generating income, PITH must be included.

CMHC uses credit score weighted debt ratio formula. If your credit score is less than 680 then maximum allowed GDS / TDS are 35% / 42% respectively. If the borrowers beacon score is above 680 than those ratios are increased to 39% and 44% respectively.

1: Monthly obligations include 50% of condo fees, if applicable.

Rental offset provided a little more flexibility over rental income method. Among three major mortgage insurers only one is left who still offering rental offset on income properties.