Mortgage Changes When You Convert to a Rental
Once your home is no longer your principal residence, your lender needs to be told, and this can affect your mortgage terms and insurance requirements. If you need to qualify for a new mortgage on your next home while keeping the old one, the lender will look at expected rental income and your total debt load together.
Tax Implications to Understand
Rental income is taxable, but you can deduct expenses like mortgage interest, property tax, insurance, and repairs. There is also a change in use rule under Canadian tax law that can trigger a deemed disposition, so talk to an accountant before making the switch to avoid an unexpected tax bill.
- Rental income is taxable
- Expenses are deductible
- Change in use rules can apply
Qualifying for Your Next Mortgage
Lenders typically only count a portion of expected rental income toward your qualifying income, often around fifty to eighty percent depending on the lender and program. This means keeping your old home as a rental could reduce how much you qualify to borrow for your next purchase, so run the numbers early with a broker.
Being a Landlord in Toronto
Ontario's landlord and tenant rules are detailed, covering everything from rent increase limits to eviction procedures. If you are not prepared to manage tenants directly, factor in the cost of a property manager. Screening tenants carefully and understanding your legal obligations up front can prevent a lot of headaches later.
Weighing the Long Term Numbers
Consider whether the rental income will cover the mortgage, property tax, insurance, and maintenance with room to spare. If the property is barely breaking even or losing money monthly, selling and reinvesting the equity elsewhere might make more financial sense than holding onto it.
Frequently asked questions
- Do I need a different type of mortgage for a rental property?
- Not always, but your lender needs to know the property's use has changed, and future refinancing may follow different guidelines than an owner occupied home.
- How much of my rental income can I use to qualify for a new mortgage?
- This varies by lender, but many count a percentage of gross rental income rather than the full amount, so ask your broker for specifics before assuming you qualify.
- What happens if my old home does not fully cover its costs as a rental?
- You would need to cover the shortfall from other income, which lenders will factor into your debt ratios when you apply for financing on your next home.