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Getting a mortgage for your investment property is very similar to seeking out a mortgage for your primary residence. However, not all mortgage lenders are interested in taking on the risk that comes with properties used for investment purposes. Find out more about the risks and benefits of taking out an investment property mortgage, and compare investment property mortgage rates in Canada to find the best deal.
An investment property mortgage is a loan from a bank or private lender that’s used to purchase a property that you intend to make money off of. You can turn a profit from your investment property by either renting it out or by waiting for it to appreciate in value so that you can sell it for a higher price than what you paid for it.
For example, some investors will purchase a home and then rent it out over a period of 20 or more years until it pays itself off. Others will “flip” houses, which means they’ll buy an older home, renovate it and then sell it for a higher price tag in a very short time period. The type of property you buy is one factor that can affect your rental property mortgage rates and terms.
There are 3 main types of rental properties that you can invest in to supplement your income:
Most lenders will offer similar interest rates for investment property mortgages and regular mortgages. However, you may end up paying rental property mortgage rates that are marginally higher, depending on which lender you go with. Your rates will also depend on which type of mortgage you choose:
The rental property mortgage rates below are an example of the rates you might get when you apply for an investment property mortgage. Lower rates typically come from private lenders such as Tangerine, Simplii Financial, Spin Mortgage and motusbank. Higher rates are usually associated with Canada’s Big Five banks (Scotiabank, BMO, CIBC, TD and RBC).
|Term length||Fixed mortgage rates*||Variable mortgage rates*|
|1 year||1.44% to 3.44%||N/A|
|3 year||1.68% to 3.44%||2.60% to 4.40%|
|5 year||1.58% to 3.99%||1.34% to 5.90%|
*These rates are only sample rates as of December 14th, 2020, and may vary depending on a number of factors. You should start by comparing multiple lenders in real-time to find the best rates for you.
There are other individual factors that can influence your investment property mortgage rates in Canada. These include the following:
You’ll typically pay marginally higher rates for an investment property than you will for a personal mortgage. This is because many lenders consider investment property mortgages as more “risky”. This is because there’s a higher likelihood that a borrower will default on an investment property (rather than a property they actually live in).
This risk factor means that investment properties often come with stricter lending requirements, tighter borrowing limits and higher rental property mortgage rates. That said, your risk factor can be reduced if you can show your lender that you have an excellent credit score, a high income, job stability, and significant equity in your primary residence.
Keep in mind that residential lenders can’t fund investment properties where the owner doesn’t spend at least two weeks per year in it.
Your down payment will vary based on factors such as whether you live in your investment property and how many units it has:
You should also keep in mind that you’ll be required to pay for mortgage default insurance for any down payment that’s under 20% of your total mortgage amount. This insurance can be very costly so it’s recommended that you try to make a minimum 20% down payment wherever possible – even if it’s not mandatory.
If you already own a property, you may want to consider using the equity in that property as a down payment on your investment property. You can do this by taking out a home equity loan or line of credit on your primary mortgage.
In Canada, you can borrow up to 80% of the equity in your home which, in the above example, would be $444,000. You’ll need to pay interest on any amount you borrow and your total mortgage amount will be added to your debt load.
This means you’ll be responsible for paying off your primary mortgage, your home equity loan you borrow to cover your down payment, the mortgage payments on your new property and any other outstanding debts you may have.
Your amortization period will depend on how much money you put down on your investment property upfront. For down payments that fall below 20%, you’ll only be able to qualify for a maximum amortization period of 25 years or less. For down payment over 20%, you may be able to qualify for an amortization period up to 35 years.
The main benefit of a longer amortization period is that it will reduce your monthly payments. That said, lengthening your term for repayment also comes with several drawbacks. These include higher rental property mortgage rates, a higher amount of interest accruing over a longer period of time and more negotiations required for refinancing.
There are a number of differences between a bank and a mortgage broker. Banks are only able to offer you rates for their own mortgage products. You’ll need to negotiate these rates yourself, and there’s a higher chance that you’ll pay more than necessary for your loan. The main benefit with big banks is that they are a reputable source for financing and offer a high level of customer service.
Brokers are different from banks because they aren’t direct lenders. Instead, they help you compare the rental property mortgage rates on offer from multiple lenders at one time. This means you get access to many financing options, and you can choose the rates that make the most sense for your financial situation. Most brokers will also negotiate on your behalf to help you get the lowest rate on the market.
Regardless of the route you choose, you will want to ensure that your lender can fund an investment property, especially if you are not planning to spend much time there throughout the year. Many residential lenders cannot finance investment properties unless the owner is planning to spend a minimum of two weeks per year living there.
An investment property mortgage differs slightly from a conventional mortgage in a few key ways. That said, there are still a few basic factors you’ll want to look at when comparing different mortgages and lenders.
To apply for an investment property mortgage, you need to meet the following criteria:
You may need to provide a number of documents to qualify for an investment property mortgage. These can include the following:
There are 3 main debt ratio calculations a lender might use to figure out if you’re eligible for a mortgage, and what your investment property mortgage rates should be.
The calculation your lender uses can affect your eligibility for an investment property mortgage. Understanding which formula they’re using can help you improve your chances of qualifying.
There are a number of benefits and risks involved with taking out an investment property mortgage.
Savvy investors tend to look at multiple property strategies to maximize their wealth creation. These include the following:
In addition to a traditional mortgage, you have a few different financial paths to fund your investment property purchase.
An investment property can be a good investment as long as you know how to work the system. You’ll also want to make sure that you’re in a good financial position to take on the extra burden of managing this type of mortgage. Find out more about the risks and benefits of purchasing an investment property, and learn how to lock in the best mortgage to maximize your investment.
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