(June 12, 2022)
Key principles and how to qualify for investment property mortgages:
1) Use a Mortgage Broker
Whether you’re purchasing your very first rental property or expanding upon your multi-property portfolio, a mortgage broker should be an integral part of your team. Lenders have varying qualification rules when it comes to rental properties – it is critical to have access to as many as possible when you begin your qualifying process and mortgage brokers are your gateway to Canada’s top lenders. More lenders equate to more options which ultimately lead to more possibilities and opportunities.
2) Buying your first investment property is easy
Your first rental property can be acquired in one of the following ways:
(i) If you’re looking to upgrade from your current residence, rather than selling it, consider refinancing the property and using the funds as a down payment to purchase the new property. If you are successful, you now own two properties; a new principal residence and your newly re-purposed rental property! As you are purchasing a new principal residence, a minimumdown payment of only 5% is required (up to $500,000, then 10% on the balance thereafter up to $1M at which time the down payment minimum increases to 20%)
(ii) While continuing to live in your home, consider refinancing it and use the proceeds as a down payment to purchase your very first rental property. However, unlike the previous example, your minimum down payment is 20% as the subject property is classified as a rental/investment as opposed to a principal residence.
(iii) Sell your current property and ration the proceeds of the sale to serve as two separate down payments; one for your new principal residence and the other for a rental property (call Marko to explore how much you would qualify for).
3) Purchasing additional rental properties
If you haven’t incorporated the services of a mortgage broker for your first rental property purchase, you will certainly look to do so for your additional property purchases. Depending on your personal qualifying details a mortgage broker will place you with a lender that is better suited and accommodating to your qualifying income. For example, Lender A will allow you to use 50% of the projected rental income towards your personal qualifying income, whereas Lender B may allow for a higher portion of the rental income to be used. Furthermore, Lender B will also apply the rental income towards offsetting the overall debt liabilities…this allocation is monumental and drastically reduces the overall debt servicing ratio of the application.When owning multiple rental properties, it is critical to position/place each mortgage with the next purchase in mind. Very few mortgage brokers are informed and aware of the extensive qualification guidelines and policies of all the lenders. Try your best to commit to a single mortgage broker and stay the course with him/her as you expand your property portfolio. This will keep your process of acquiring more properties efficient, organized and strategic.
4) Product and Term Selection
All terms and product features typically associated with regular mortgages are also available for rental property mortgages. Here are some common product features and characteristics that investors typically seek out when mortgaging a rental property:*many investors swear by choosing variable rate mortgages mostly due to their minimal exit costs (in the event you sell or refinance ahead of your term)*maximum amortizations are a must…whenever possible, seek out the maximum amortization when securing a rental property mortgage. At the time this post was written (June 2022), the maximum amortization period for conventional “AAA” lending in Canada is 30 years. There are additional lenders that offer 35 year amortization and interest only payments, but the interest rate offering is higher and fees may also apply (ranging from 1% to as high as 5%)*select a product that converts your accumulated paid principle into a readvanceable reserve. For example, let’s say you are 5 years into a mortgage and have paid it down by $60,000. In a readvanceable mortgage, the $60,000 would be available to you in the form of a home equity line of credit that could be accessed by you at any time without having to re-qualify.
5) The end game
The immediate objective of owning a rental property is to increase your monthly income cash flow from the rental payments you collect. And in today’s shared economy (via AirBnB) many investors are deciding to re-purpose their rental properties from long term tenancy agreements to short term stays. Depending on the location of your property, the income generated from your short term stay agreements could significantly outperform the market value for extended long term agreements. The long term play of owning a rental property is the accumulation of equity from the ongoing mortgage payments and the natural market appreciation over time. Also worth mentioning is that the costs of ownership associated with your rental property are eligible tax deductions (consult further with a tax professional about these benefits).
Call Marko to see if you qualify for an investment property mortgage!
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