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Is an investment property mortgage right for you?
Compare rates and fees for the best deal on rentals and secondary properties.
Investment property mortgages are designed to help investors interested in buying rental and similar properties with affordable rates. But not all lenders are interested in taking on the risk that comes with properties you don’t intend to live in. Research your options to find fixed or variable rates to best support your investment strategy.
Investment mortgage rates explained
If you’re taking out a mortgage for a rental property, expect to pay a higher interest rate than a property for a primary residence. How much higher depends on your property, credit history and your down payment.
How do I compare investment property mortgages?
Investment loans differ from conventional mortgages in a few key ways. Compare key factors of investment loans to find the best fit for your strategy:
- Rates. Interest rates greatly affect your repayments. Compare both fixed and variable rates with a few providers before settling on a loan.
- Eligibility. Make sure the loan fits your investment strategy. Not every mortgage is available for commercial property, for example, and some loans limit your property’s square footage. Others aren’t available for specific property types, like inner-city apartments.
- Investor benefits. If you’re investing, look into home loan features that can maximize your tax benefits or cash flow, especially if you intend to rehab or “flip” your property.
- Fees. Compare not only application, appraisal and legal fees but also ongoing fees to ensure what you’re paying saves you money or reduces costs over the life of your loan. If your loan has an annual fee, for example, it may come with flexible terms that allow you to use it as you want to.
- Repayment flexibility. If you plan to put extra money toward your mortgage, confirm that your lender won’t impose a prepayment penalty.
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How investment property mortgages differ from residential home loans
Lenders consider mortgages for investments 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, home loans for investment often come with stricter lending requirements, tighter borrowing limits and higher interest rates. They may also have a higher loan-to-value ratio, requiring you to save up higher down payment than required for a conventional mortgage.
How can I make sure I’m eligible for investor financing?
Your potential lender must be confident that you can repay your investor mortgage. To maximize your chances of success, save up a save a decent down payment, prepare clear evidence of your income and check your credit report for outstanding debts and liabilities. Know too that the property you buy may affect your approval. Some lenders are reluctant to fund purchases of risky properties, like small apartments in suburbs with iffy future marketability. You may need to approach a different lender or come up with a bigger deposit.
Pros and cons
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 5.5% 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 advantages.
- 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 high closing costs, building 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 takes time. If you often need cash on short notice, property investment may not be for you.
- Fluctuating cash flow. If you rely on rental income to pay off your property investment, you face the risk of falling behind during periods of tenant turnover. Make sure to build a cash buffer to ride out these periods.
5 more ways to finance an investment mortgage
Consider any of these alternatives to fund your investment property purchase.
1. Home equity loans
Use these loans to tap into up to 85% of your existing home’s value to fund the purchase of your investment property. Home equity loans typically come with closing costs, though they average less than those of traditional mortgages.
Check out more about home equity loans and find out how to up your chances of approval.
2. 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.
Deciding not to buy the property won’t harm your credit at all. But you will lose any fee or increased rent you put towards it.
3. Investment partners
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.
4. Mortgage transfer
Less common, 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. This clause causes the full amount remaining on the mortgage to be due upon transfer. Meaning you’ll be stuck paying the entire amount at once, rather than taking over the same payments that the seller had.
5. Owner financing
Another lesser used type of financing is owner or seller financing. Rather than taking a mortgage out, you as the buyer enter into an agreement with the seller of the property. The two parties agree upon the term, interest rate and any other loan stipulations.
However, the seller must own the property outright or have a mortgage with a bank that agrees to the arrangement.
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 this strategy, arm yourself with information to find the best mortgage to maximize your investment.
Frequently asked questions
- Do I need a down payment for an investor mortgage?
Yes, in most cases. You may find lenders willing to lend you up to 95% of the investment property’s value.
- Do I have to pay capital gains tax on my investment property if I sell it?
As of 2018, if you hold your property for less than a year, you’ll pay a capital gains tax no matter your income. If you hold the property for more than a year, you’ll pay the tax if you make more than $38,600 per year. Talk to a tax or investments professional to learn the specifics that apply to your property.
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