How to Offset Your Mortgage Costs with an Income Suite

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The ongoing costs of owning a home can seem like a lot for many buyers. There are property taxes, utilities, and of course, the mortgage. But an income suite can make life a bit easier when you have an additional source of income every month.

Rental income can help with the mortgage payments, allow you to pay off your mortgage early if you put the rent towards the mortgage, or let you buy a more expensive home.

If you plan on buying a home with an income suite, it may be easier to qualify for a mortgage. The Canada Mortgage and Housing Corporation (CMHC) now considers up to 100% of gross rental income from a two-unit owner-occupied property that’s the subject of a loan application submitted for insurance.

There are a few things to keep in mind, however. The income suite you plan to rent out must be self-contained. In other words, the suite needs to have a separate entrance as well as its own living, kitchen, and sleeping area. But there can be a shared hallway, parking area, and laundry room.

Let’s assume you and your partner earn a total of $100,000 before taxes every year. If you can make a down payment of $50,000, a mortgage affordability calculator shows you can spend as much as $518,888 on a home (our example assumes the best mortgage rate of 2.29%, an amortization period of 25 years, and a five-year fixed-rate mortgage).

If your income suite rents for $1,000 a month, your total annual income will now be $112,000. This means you’ll be able to afford a home costing $572,341—an increase of $53,453. For a home priced at that amount, the monthly mortgage payment will be $2,377. If you apply all of the rental income to your mortgage payment, your monthly payment will drop to $1,377. The additional income covers 42%—or nearly half—of the mortgage payment each month.

Alternatively, you can use your rental income every year to make an annual prepayment towards your mortgage. If you make an annual prepayment of $12,000 a year, you’ll be able to pay off your mortgage nine years early and save as much as $66,658 in interest (assuming the rate stays at 2.29%).

If you already own a home but you don’t have an income suite, you may be able to add one to your existing property. But before you do, think about whether it’s worth the cost of doing so. If you only need to spend $25,000 and can get $1,000 or more in rent each month, it’ll technically pay for itself in about two years. However, if the cost of a renovation is closer to $70,000 because you need to lower your basement and you expect to get only about $750 a month in rent, it may take too long to pay for itself. There’s also the possibility you’ll decide to sell your home and move somewhere else before you realize the return on your investment.

Also, there are many regulations and bylaws you’ll have to comply with in order to create an income suite. Make sure you check with your municipality and get the proper building permits before proceeding with any work. And you’ll need to familiarize yourself with the landlord rights and responsibilities in your province or territory before becoming a landlord.

The bottom line

A property with rental from an income suite can be a great way to help reduce the costs of owning a home and help you pay down your mortgage early.