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Renting out part of your home to pay down your mortgage sooner

Tangerine (Advertorial) logo Tangerine (Advertorial) 2017-04-27

How would you like to reach mortgage freedom sooner? The rising cost of real estate means many of us are taking on larger mortgages than ever before to purchase our dream home. This has homeowners looking for creative ways to pay down their mortgage.

Many are buying homes with the idea of renting out a part of them. Two popular ways are: renting out your basement or using short-term rental sites like Airbnb®. There are upsides (extra income) and downsides (upkeep, strangers in your home) to this strategy, but it's something many new homeowners are considering.

Renting out your basement

Renting out your basement is perhaps the easiest way to earn extra income to pay down your mortgage sooner. Through renting out part of my house, I was able to pay off my mortgage in three years by age 30. This is ideal for homeowners in houses and duplexes (it won't work for those who live in condos, since you won't have a basement).

Before buying a house with a secondary suite, it's important to make sure you're allowed to rent to a tenant. Rental suites are illegal in some municipalities in Canada. Once you've determined you can be a landlord without breaking the law, find out what your municipality's legal requirements are for a secondary suite so you can ensure yours is acceptable. Legal secondary suites typically have requirements like minimum ceiling heights, separate entrances and fire separation between the units.

When qualifying for a mortgage, you'll need to disclose to your lender that you're planning to rent out part of your home. This could cause your mortgage requirements to change. The minimum down payment amount depends on whether you plan to live in the house and how many units it has. For example, in an owner-occupied one or two unit home, the minimum down payment is five percent of the purchase price for homes under $500,000. However, if you won't be living there, or the house has three or more units, the minimum down payment can jump to 20 percent.

Short-term rental sites

The sharing economy has created a new opportunity for homeowners looking to pay down their mortgages sooner. Some homeowners are setting aside a room or part of a duplex for Airbnb or other online services. This is a larger trend in pricey real estate markets like Toronto and Vancouver, where detached home prices have climbed to over $1 million. According to a report by Airbnb, over half of Vancouver Airbnb hosts use the income they earn to pay their mortgage and rent.

Short-term rental sites can be a great way to earn income, but they're not without their pitfalls. Most lenders won't recognize income earned from these sites for mortgage qualification purposes.

Before you start renting out your place on Airbnb, be sure to let your lender know, since it's considered a change in use of your property. Also, make sure it's legal in your municipality. That means checking city bylaws (or asking your real estate lawyer to do so). For example, in Toronto, by renting your property on Airbnb, it could be considered a hotel. As such, you'd need to make sure your place complies with health and safety standards and has the appropriate licences and permits similar to hotels.

If you're buying a condo with hopes of renting it out on Airbnb, ask condo management ahead of time if you're allowed to. Many condos don't let you rent them out short-term.

Remember, you're making decisions about your home — these aren't decisions you'll want to make lightly.

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