Investment property mortgages

Getting a mortgage for your investment property is very similar to getting a mortgage for your primary residence. But there are some key differences to be aware of, and not all mortgage lenders are interested in taking on the risk that comes with investment properties.

In this guide, we’ll explore the benefits and risks of investment property mortgages, and compare investment property mortgage rates in Canada to help you find the best deal.

What is an investment property mortgage?

An investment property mortgage is a loan you can use to buy an investment property. You can make money from your investment property by either renting it out or by waiting for it to increase in value so that you can sell it for a higher price. The income generated from your rental property can then be used to pay off your mortgage.

For example, some investors will purchase a home and then rent it out 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.

Regular mortgage vs investment property mortgage: What’s the difference?

You’ll typically pay slightly higher rates for an investment property than you will for a regular mortgage. This is because lenders believe there’s a higher risk of defaulting on your loan.

This risk means that rental properties often come with stricter lending requirements, tighter borrowing limits and higher investment 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.

It’s also worth pointing out that not all financial institutions offer investment property mortgages, so you may need to shop around for the right lender.

Investment property mortgage down payment

You’ll typically need a larger down payment for an investment property mortgage than you would for a regular mortgage. You’ll have to pay a minimum of 20% as a down payment if you don’t live in your investment property.

But smaller down payments are allowed in specific circumstances, such as if you’re buying a residential property with less than five units and plan to live in one of the units. You should also keep in mind that you’ll be required to pay for mortgage default insurance if your down payment is less than 20%. This insurance is expensive, so it’s recommended that you try to make a minimum 20% down payment wherever possible — even if it’s not mandatory.

Using the equity in your home to fund an investment property down payment

If you already own a home, you may want to consider using the equity in that property as a down payment on your investment property loan. You can do this by taking out a home equity loan or line of credit on your primary residence.

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 80% of the equity in your home. In the above example, that would be $440,000. 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.

Investment property mortgage rates in Canada

Most lenders will offer similar interest rates for investment property mortgages and regular mortgages, but rental property mortgage rates are usually marginally higher. Your rates will also depend on which type of mortgage you choose:

• Fixed vs variable rate. Fixed rate mortgages tend to cost a little bit more at the outset, but they come with the benefit of consistent monthly payments. Variable rate mortgages can fluctuate up or down, depending on what the market is doing. These loans typically start off low but may increase and cost more over time.
• Open vs closed mortgage. Closed mortgages typically come with lower interest rates than open mortgages. However, they don’t allow you to refinance or repay your loan before your term is up unless you pay a penalty. Open mortgages give you more flexibility to prepay or renegotiate your loan without an added fee. The downside is that they typically come with higher interest rates.
• Short-term vs long-term mortgage. You’ll commonly pay more for a shorter loan term, and get lower interest rates for a longer term. Check the rates for a number of different terms to find the best deal.

Other factors that influence your investment property mortgage rates

There are other individual factors that can impact your investment property mortgage rates in Canada. These include the following:

• Credit score. Your credit score will tell your lender how likely you are to repay your mortgage on time. The better your credit score, the lower your interest rates will be.
• Down payment. Making a larger down payment could help you qualify for a lower interest rate.
• Amortization period. Your amortization rate allows lenders to calculate your monthly payments over an extended time period (usually 25 years or less). Any amortization period that goes beyond 25 years will usually come with higher interest rates.
• Debt-to-asset ratio. Your debt-to-asset ratio weighs the value of your assets and income against the value of the debt you still owe. The more you own outright and the less debt you have, the less you’ll typically have to pay in interest.

Amortization periods for investment property mortgages

Your amortization period (how long it takes to pay off your investment property loan in full) 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. For down payments over 20%, some lenders offer amortization periods of up to 35 years.

The main benefit of a longer amortization period is that it will reduce your monthly payments. But higher interest rates apply, and a longer loan term means you’ll end up paying more interest over the life of the loan.

Should I get an investment property mortgage through a bank or mortgage broker?

Banks are only able to offer you rates for their own mortgage products. You’ll need to negotiate these rates yourself, so you may end up paying more than necessary for your loan. But 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 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 mortgage that suits your financial situation. Brokers will also negotiate on your behalf to help you get a better rate.

The choice of bank vs mortgage broker is up to you. If you have a solid, long-term relationship with your bank and can get an attractive rate, you may choose to take that route. But if you want to shop around and compare products from multiple lenders, a mortgage broker is a better option.

How do I compare investment property mortgages?

There are a few key factors you’ll want to look at when comparing mortgages and lenders.

• Rates. Compare both fixed and variable investment property mortgage rates in Canada to make sure you get the best deal possible.
• Mortgage type. Compare different types of mortgages to decide which type is the best fit for you. For example, some investors will benefit from a short-term open mortgage while others will be better suited to a closed mortgage with a long amortization period.
• Fees. Find out how much you’ll have to pay for extra charges such as valuation, legal, title search and application fees. You’ll also want to figure out what penalty you’ll be required to pay if you want to prepay your loan with a closed mortgage.
• Prepayment. Check whether you can make extra repayments at any time and prepay your mortgage early without penalty. This can help you cut down on your debt if you come into some extra cash.
• Eligibility. Make sure the mortgage you choose fits your investment strategy and is available for the type of property you’re interested in buying. You’ll also want to make sure you meet all of the lender’s eligibility requirements.

What should I know before I apply?

Eligibility requirements

To apply for an investment property loan, you need to meet the following criteria:

• Be the age of majority in your province or territory
• Be a citizen or resident of Canada
• Be free from bankruptcy or other forms of unmanageable debt

Mortgage qualifications

You may need to provide a number of documents to qualify for an investment property mortgage. These can include the following:

• Proof of income. You’ll be required to submit documents like pay stubs and letters of employment to verify how much money you make.
• Proof of down payment. You’ll usually have to show that you have enough money in the bank to cover your down payment (and additional mortgage fees).
• Credit report. You’ll need to authorize your broker or lender to pull your credit report so that they can assess your creditworthiness.
• Government-issued ID. You’ll have to show proof of ID like your driver’s licence or passport to start the application process.
• Property documentation. The lender will need to see the Agreement of Purchase and Sale as well as zoning documentation for your investment property.
• Other financial information. You could be required to provide information about your debts and assets so that your lender can calculate your debt ratio.

What to watch out for

• Difficult to finance. It can be difficult to get financing for an investment property, especially if you already have a high debt load or you don’t have many assets.
• Large down payment. If you won’t be living in the investment property, you’ll need a down payment of at least 20%.
• Higher interest rates. You’ll typically pay higher rates with an investment property loan than you will with a personal mortgage. This is because lenders see this type of mortgage as more risky.
• 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.
• High costs. You could be stuck paying for everything from property taxes and pest inspections to legal charges and maintenance costs. These bills can rack up quickly and cost you more than expected over time.

What other loan options are available for investment properties?

There are a few other ways to fund your investment property purchase.

• Home equity loans. Use these loans to tap into up to 80% of your existing home’s value to fund the purchase of your investment property.
• Rent to own. In some cases, you can find properties that are ‘rent to own’. During the time you’re renting the property, you can save up for a down payment and bolster your creditworthiness.
• Invest with another person. If you’re short on a cash down payment, you may be able to partner with another person to get your property. It means a split in the profits, but it could lead to you getting your initial investment property sooner.
• Mortgage transfer. Less commonly, you can sometimes assume an existing mortgage, usually for a fee. To fully assume a mortgage at the rate the seller is paying, you’ll have to check if it has an Assumption Clause.

Bottom line

Investment property mortgages come with slightly higher interest rates and stricter eligibility criteria than regular mortgages. But they allow you to fund up to 80% of the purchase price, and the lender will factor in the future rental income you’ll earn when deciding how much you can borrow. Compare investment property mortgage rates from a range or lenders, or consider using a mortgage broker to help you find the best deal.

Frequently asked questions about investment property mortgages

• Do I need a down payment for my investment property mortgage?

  Yes. You'll need to pay a minimum 20% down payment if you own an investment property but don't live in it. You may be able to pay a minimum of between 5% and 10% for an investment property that you live in. You'll also be required to take out mortgage default insurance for any down payment that falls below the 20% mark.

• Do I have to pay capital gains tax on my investment property if I sell it?

  Yes. You'll need to pay capital gains tax if your property wasn't your primary residence for every single year that you owned it. This tax amount works out to 50% of any profit you make when you sell the property. For example, if you make a net gain of $100,000 on a property, you'll pay capital gains tax on $50,000 of that.

  There are a number of loopholes you can take advantage of to reduce your tax bill. Learn more about how capital gains tax works here.

• Can you use future rental income to qualify for a mortgage in Canada?

  Yes, you can use the future rental income you will earn from your investment property to qualify for a mortgage. The lender will usually take into account 50% of the future rental income when assessing your eligibility, or more in some cases.

• How much tax do I pay on rental income in Canada?

  You'll pay tax on your rental income at your marginal tax rate. Check the Government of Canada website to find out which tax bracket you fall into.

• Is it harder to get a mortgage for an investment property?

  Yes, it is generally more difficult to get a mortgage for an investment property than for your primary residence. Not only will you require a higher down payment, but lenders also have stricter income and eligibility requirements for investment property loans.

• How much do you need for an investment property in Canada?

  If you will not be living in the property, you'll need a down payment of at least 20% to qualify for an investment property mortgage. The minimum down payment falls to 5-10% for an investment property that you plan to live in, but this varies depending on how much you pay for the property and how many units it has.