Could Renting Space in Your Home Put Your Mortgage at Risk?

Could Renting Space in Your Home Put Your Mortgage at Risk?

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More and more, homeowners throughout Canada find themselves intrigued by the possibility of using their home or property as rental space. In 2018, even as the long-term rental market swelled, the nation’s short-term rental opportunities exploded. Airbnb rentals alone accounted for more than $1.5 billion in revenue. What’s more, about a third of that income came from Canada’s gorgeous rural areas.

Table of Contents - Could Renting Space in Your Home Put Your Mortgage at Risk?

In other words, no matter where you call home in Canada, it’s likely that someone wants to plan a visit there. That means the opportunities for homeowners looking to make a quick loonie have never been more robust. Before you set about tidying up your spare room or extra home to use as a rental property, however, you should know that your new entrepreneurial endeavour could have implications for your mortgage.

Here’s what you need to know.

Insurance is a whole different gorilla

Homeowners understand that their mortgage and their insurance coverage are two distinct things. Still, it bears repeating when you’re about to use your home for commercial purposes.

Your insurance company will have an entirely different rubric for judging your home as a rental property. You would be wise to inform them of your intentions and explore extra coverage options for your space. It’s a relatively straightforward process (except for the part about dealing with an insurance company, of course).

When it comes to your short- or long-term rental property, handling your mortgage requires education and a light hand.

Don’t worry if it’s just a room in your primary residence

If you’re a homeowner who will continue to live in your house while renting out a room or a guest house on your property, you are most likely fine. Mortgage brokers and banks typically breathe a sigh of relief when the principal mortgage holder remains under the same roof as their rental space because they believe that it increases the likelihood that the checks will continue to roll in on time.

In other words, if you’re living there, banks assume that you have plenty of motivation to keep paying the mortgage. When you’re not living on-site, lenders believe you’re not as compelled to pay your bills.

Long-term leases get some wiggle room

If you’re planning to turn a former residence into a long-term rental, some mortgage lenders will still allow you to renew your lease. Banks enjoy the stability of a long-term lease because they understand that one tenant will be paying rent over an established period.

A mortgage broker or mortgage agent can help you find the right lender for a long-term rental opportunity. As with any lending opportunity, you’ll need to shop around first.

Short-term rentals are problematic

For the same reason that long-term rentals can appease lenders, short-term rentals set them ill-at-ease. Short-term rentals provide no promise of consistent income. Also, a lot of short-term rentals come with a dry season, where finding a rental opportunity is more difficult for entrepreneurs. That’s to say nothing of the financial industry’s belief that short-term tenants typically ignore routine wear and tear, lowering the property’s value at a faster rate.

From a mortgage lender’s perspective, lowered value plus iffy income equals a lousy investment. If you’re not living in the place you’re renting out, most lenders will not give you a mortgage, or they won’t renew your mortgage when the time comes.

Lenders can choose not to renew your mortgage

Over the last several years, there have been very few cited cases in which a mortgage lender chose to revoke a mortgage based on a borrower’s shifting intentions for the property. When the hammer does drop, however, it can get ugly for a homeowner who isn’t prepared.

If you use your home as a rental property (i.e., for commercial purposes), your lender is well within their rights not to renew your mortgage. Should that happen, you may find it difficult to obtain financing from a new lender to pick up your mortgage, as they will not want to assume the risk, either. In these (rare) instances, your best option is to either sell your home or apply for a commercial mortgage, the rates for which are substantially higher than for a residential mortgage.

Be honest

Even as the rental market in Canada hits new highs of success, one could read the above report and be tempted to breathe a sigh of relief and keep their home’s rental status on the Q.T. Don’t make the mistake of trying to hide your rental property from your mortgage lender.

With the enormous success of short-term rental companies like Airbnb and Vrbo, it’s only a matter of time before legislation is handed down that empowers lenders to take a more active stance when it comes to revoking, renewing and reclassifying mortgages. Just because you’re getting away with it now doesn’t mean you’ll get away with it forever.

Additionally, hiding your home’s rental status is nearly impossible. Consider this: to make a go of renting out space in your home, you have to enroll in a short-term rental site, or you have to publicize its availability to the local public. Either way, your home will show up on the internet. That means double-checking your home’s rental status is a matter of a simple Google search.

The smartest tactic when you’re planning to turn your home into a short- or long-term rental space is to begin by speaking to a mortgage broker or mortgage agent. These professionals can listen to your goals and then research the right mortgage for your needs. Then, they’ll help you procure it or transition to it via the smoothest possible route.

Rentals are an excellent way to bring in additional income from your property; however, it’s not worth it if it jeopardizes your mortgage. It’s best to start your rental

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Scott Dillingham

Scott Dillingham

I have been investing and lending to real estate investors for nearly 10 years now. After thousands of successful deals between flips, rent to owns, student properties and commercial assets I have developed a deep knowledge of real estate investments and have a passion of sharing this information with the world! If your looking for a lender who specializes in rental property financing you're going to want to connect with me at team@lendcity.ca.