Renting rooms in principal residence....is it (il)legal???

6202 Views 7 Replies 6 Participants Last post by canadianbanks, Jun 18, 2009

KanyEast

Discussion Starter · Jun 17, 2009

I need some brilliant advice from all you knowledgeable real estate gurus. I'm just about to purchase my first house which will be my principal residence. I'm a single dude and i'm thinking of renting out 2 spare rooms right away. I wanna know if this is legal with the banks?? I think rental/revenue properties are handled differently from getting mortgage for a principal residence. Can anybody please let me know if i'll be doing anything illegal by renting or do i need to inform the bank that though it's my principal home i'll be renting rooms out????
Thanks!!

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George

· #2 · Jun 17, 2009

The banks treat investment properties differently from a principal residence when issuing a mortgage, but if the home is your principal residence, you'll be just fine.

There's nothing wrong (from the bank or mortgage perspective) with renting out rooms in your house. You might, however, want to check the local bylaws regarding "secondary suites". As a rule, though, if you want to rent out a room and charge the roommates rent, you're totally free to do that - it's your house to do with as you please.

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MoneyGal

· #3 · Jun 17, 2009

What George said.

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Cal

· #4 · Jun 17, 2009

Yeah...I wouldn't even say anything to the bank....unless you need to show more earned income to qualify for the mortgage.

A heads up though that if you do claim the rent as income that the most you can claim is 50% of your expenses (mortgage interest, heat, hydro etc.) despite the fact that you are renting out 2/3 of your principle residence. (assuming that you rent out 2 of 3 bedrooms and share the rest of the house)

At least thats the way I understand it in Ontario.

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George

· #5 · Jun 18, 2009

rookie888 said:
Yeah...I wouldn't even say anything to the bank....unless you need to show more earned income to qualify for the mortgage.

Telling the bank that you'll have income because you're planning on renting out rooms won't help you qualify for a larger mortgage. Especially with the current lending/credit situation, banks are much more careful when issuing loans. They want to make sure that you'll be able to make the mortgage payments even if the rooms you plan to rent remain vacant.

It'll help you pay the mortgage after you have the house, but it probably won't help you qualify for the mortgage in the first place.

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MoneyGal

· #6 · Jun 18, 2009

Here's the Revenue Canada circular: If you rent out 2 of 3 bedrooms, you are not renting out 2/3 of your house. You are renting out 2/3 of your bedrooms.

The linked circular provides details about how to calculate your expenses. There's no upper bound on the personal portion you can claim. However, you cannot claim expenses that bring your income down to zero: you must have a reasonable expectation of profit (which, in practice, means actually showing a profit) in order to claim any expenses at all.

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ashby corner

· #7 · Jun 18, 2009

If you're just renting to your friends, I'd say nuthin' to nobody. No sense in triggering CRA to think it's a rental property. It ain't...it would end up being more of a pain in the ar*e than anything else. Remember the "reasonable expectation of profit rule". You're not trying to MAKE money, you're trying to lower your living expenses by having some friends live with you. They just contribute to the day-to-day costs associated with living in that house.

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canadianbanks

· #8 · Jun 18, 2009

George said:
Telling the bank that you'll have income because you're planning on renting out rooms won't help you qualify for a larger mortgage. Especially with the current lending/credit situation, banks are much more careful when issuing loans. They want to make sure that you'll be able to make the mortgage payments even if the rooms you plan to rent remain vacant.

It'll help you pay the mortgage after you have the house, but it probably won't help you qualify for the mortgage in the first place.

I agree with the above and I would also advise to talk to an accountant about this first.

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