Getting a mortgage for your investment property is almost no different than seeking out a mortgage for your primary residence. However, not all mortgage lenders are interested in taking on the risk that comes with properties you don’t intend to live in. To find a lender and get a competitive interest rate, you’ll need to research your options to find fixed- or variable rates to best support your investment strategy.
An investment property mortgage differs slightly from a conventional mortgage in a few key ways – but there are still a few basic factors you’ll want to look at when comparing different mortgages and lenders.
Rates. Interest rates greatly affect your repayments. Compare both fixed- and variable rates with a few providers before settling on a mortgage.
Eligibility. Make sure the mortgage fits your investment strategy. Not every mortgage is available for commercial property, and others may not be available for specific property types, like cottages or properties on leased land.
Investor benefits. If you’re investing, look into mortgage features that can maximize your tax benefits or cash flow, especially if you intend to renovate or “flip” your property.
Mortgage type. Compare different types of mortgages to decide whether an open or a closed mortgage will best suit your needs. While rates can be lower for closed mortgages, you have much less flexibility. Since an investment property’s purpose or income can change, an open mortgage might be more suitable – giving you the flexibility to make adjustments to your mortgage when needed.
Fees. Compare not only application, appraisal and legal fees but also any ongoing fees as well as prepayment penalties to ensure what you’re paying saves you money or reduces costs over the life of your mortgage.
Repayment flexibility. If you plan to put extra money toward your mortgage, confirm that your lender won’t impose a prepayment penalty. Penalties are usually charged on closed mortgages, while open mortgages tend to have more flexibility – up to a certain point of course.
How do mortgages differ between primary residences and investment properties?
Lenders consider mortgages for investment properties as a riskier product than your typical conventional mortgage. Some of that risk lies with thinking that you’re more likely to walk away from a property you don’t intend to live in yourself.
Because of this risk, mortgages for investment properties may come with stricter lending requirements, tighter borrowing limits and higher interest rates. However, these factors will also be affected by your current mortgage on your primary residence, including how much you still owe, as well as factors like your income, credit score and job stability.
How can I make sure I’m eligible for an investment property mortgage?
Your potential lender must be confident that you can repay your investment property mortgage. To maximize your chances of success, save up at least a 20% down payment, prepare clear evidence of your income and check your credit report for outstanding debts and liabilities.
Know too that the property you’re interested in buying may affect your approval. Some lenders may be less likely to approve mortgages for certain building types, land agreements (leased land vs. freehold) or locations. You may need to approach multiple lenders or come up with a bigger down payment.
Using the equity in your home to fund an investment property
If you already own a property, consider using the equity in that property as a down payment on your investment property by taking out a home equity line of credit (HELOC) on your primary mortgage. You won’t need to save up a hefty down payment, although you’ll need to repay the money you’ve borrowed to buy the property.
Calculating the equity in your primary residence
Your home is valued at $750,000
You owe $200,000 on your primary residence
Your equity = $550,000
In Canada, you can borrow up to 65% of the equity in your home which, in the above example, would be $487,500. What’s more, any outstanding mortgage balance plus your HELOC cannot equal more than 80% of your homes value. So in the above example, you’d be limited to borrow $400,000 in total since 80% of the value of the home ($750,000) is $600,000 minus your mortgage of $200,000.
How much can I borrow?
Here’s how to figure out how much you can borrow with a HELOC:
Take the value of your home and multiply it by 0.8 (0.8 represents the maximum amount of 80%).
From this number, subtract the balance of your mortgage.
The remaining amount is the amount you’d be able to borrow through a HELOC – as long as the amount does not exceed 65% of the value of your home.
What strategies can I use to make a profit on my property?
Savvy investors tend to look at multiple property strategies to maximize their wealth creation, including:
Loss offsetting. If the expenses on an investment property are greater than the income it generates, you’re working at a loss. In some cases, a loss can earn you a tax deduction – especially if you’re making renovations – to recoup some of the lost income. Talk with an accountant or tax professional to learn more.
Buy and hold. With this simple strategy, you purchase a property and hold it with the expectation that the property will grow in value over time.
Renovate. Buy a property in need of work, renovate it into a better property and raise the property’s overall value. It’s a strategy that requires hard work and money, but it can help you leverage the right property in the right market.
Passive property development. This strategy allows you to pay someone else to develop the property for you. It’s easier than going into property development yourself, but it’s not without risks.
Weighing the benefits against the risks
Choosing the right investment and strategy involves comparing your benefits against the risk. For a clear picture of what you face, talk to an investment professional to avoid any surprises down the road.
Rental income. A well-located investment property can increase your cash flow through rental income to the tune of a 3% to 6% rental yield.
Capital gain. When it comes time to sell your property, you might benefit from a capital gain if the value of your property increases.
Tax and depreciation benefits. With the help of a knowledgeable accountant, there’s room to take advantage of specific tax incentives.
Better control. Unlike other asset classes, many aspects of your property investment can be controlled. You can add value to your property through renovations, refinance your mortgage at a stronger rate or turn your property into a rental or bed and breakfast.
Potentially high costs. Aside from the property’s price, you could pay lots of fees including high closing costs, property and pest inspections and legal charges. As the owner of the property, you’re also responsible for the ongoing costs of repairs and maintenance.
Selling and renting takes time. If you often need cash on short notice, a property investment may not be for you. Selling your property may take months, and finding responsible tenants can also be a time-consuming job.
Fluctuating cash flow. If you rely on rental income to pay off your investment property, you face the risk of falling behind during periods of tenant turnover. Make sure to build a cash buffer to ride out these periods.
An investment property can help you leverage your assets and save for the future, while bringing in extra income in the meantime. If you’re considering investing in a second property, arm yourself with information to find the best mortgage to maximize your investment.
Frequently Asked Questions
Yes, like any other mortgage, you’ll need to provide a down payment of 5-20%. If you put down less than 20%, you’ll pay CMHC insurance on top of your mortgage interest. Paying this insurance is required as it protects both buyers and mortgage lenders. Keep in mind not all lenders will be comfortable with a low down payment of just 5% on an investment property. You may have to shop around for lenders who are willing to accept less than a 20% down payment on the second property.
Yes, you’re subject to capital gains tax if the property wasn’t your primary residence every single year that you owned it. 50% of any capital gain is taxable. So, if you bought a property for $400,000 and it’s now worth $500,000, you’d pay tax on 50% of the capital gain ($100,000), which means you’d pay tax on $50,000.
It’s important to note that you only pay tax once the capital gain is realized. This means that you only pay tax on it once you sell the property and realize the gain.
Since you’ll pay taxes and fees at the time of purchasing your investment property, and you may also put money into the property for renovations, you’ll be able to adjust the base cost of your home to include these numbers. You can then deduct the gains from the adjusted base cost, rather than paying tax on the gain without these costs.
Emma Balmforth is a producer at Finder. She is passionate about helping people make financial decisions that will benefit them now and in the future. She has written for a variety of publications including World Nomads, Trek Effect and Uncharted. Emma has a degree in Business and Psychology from the University of Waterloo. She enjoys backpacking, reading and taking long hikes and road trips with her adventurous dog.
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