Mortgages for Investment Properties – What You Need to Know
Has the idea of buying an investment property ever crossed your mind?
Maybe you’d like a place to rent out and have someone else pay some or all of your mortgage while you build equity in a tangible real estate asset, or perhaps as a home for your child to live in.
Whatever your reason, investing in an additional property (or multiple properties) can be a good way to accomplish those goals, but there are also some key considerations before you dive in.
Aside from the potential challenge of finding a good tenant, there are some financing hurdles that you should be aware of.
Mortgage Rules for Investment Properties
While there are many Canadian lenders that will finance rental properties, the Department of Finance tightened mortgage lending criteria as part of its rule changes introduced in 2016.
That included eliminating mortgage default insurance, for certain mortgage types, including those for investment properties with less than 5 units.
As a result, you need at least 20% down to purchase a non-owner-occupied rental property. If you plan to live in one of the units, then you can put down as little as 5% (5% on the value that is less than $500,000, and 10% on the portion above that amount).
Another factor to consider is the number of units the building has. Those with four units or less are typically zoned residential, so qualifying for a mortgage would be similar to the one on your principal residence. Multi-unit properties with five or more units are generally zoned commercial and involve a different type of qualification for a commercial mortgage, which I can advise you about.
Mortgage Rates for Investment Properties
Because the best mortgage rates are generally reserved for those putting down less than 20% or more than 35% of the property value, rates for investment properties (which require at least 20% down) are sometimes priced a little bit higher.
Most lenders will also upcharge at least 10 to 20 bps more for non-owner-occupied rental properties, as they entail some additional risk. For one, if the borrower came into financial trouble, they’re more likely to prioritize payments on their principal residence before payments on their rental property.
Fixed or Variable for an Investment Property?
This is probably the most commonly asked mortgage question for homebuyers, but it’s a particularly important consideration for investment property owners.
The majority of mortgage holders in Canada opt for the stability of a fixed mortgage rate—72%, or 4.45 million borrowers, according to the latest data from Mortgage Professionals Canada.
But many investment property owners will tell you that a variable rate is the way to go thanks to the flexibility they offer. One of the biggest advantages of a variable rate is a lower prepayment penalty of just three months’ interest should you need to sell or if you want to pay down your mortgage more quickly than the annual prepayment privileges permit.
We Can Help
Everybody’s situation is unique, and no advice applies to everyone equally. If you’re interested in exploring your options relating to buying an investment property, be sure to contact us and we can review your personal situation and offer custom-tailored solutions.