Rental Property Mortgages
Understanding mortgages in Canada can be overwhelming. A rental property mortgage has unique features that make them different from conventional mortgages. Finding a lender who is willing and able to offer you a mortgage for a rental property is another task that requires patience and diligence. If purchasing rental properties is on your wish list, take a moment to review some valuable information written by Boychuk Mortgage Group below.
Let’s take a moment to discuss some of the factors lenders will consider about you and your property of interest when determining if you qualify for a rental property mortgage.
Minimum down payment
The minimum down payment is 20% unless you plan to occupy part of the property. In this case, a down payment of less than 20% is allowed. Where it is a stand-alone rental, 20% is required in all cases.
If occupying a unit in the property, 25 years is the max amortization. Otherwise, 30 years is the max amortization. Alternative solutions allow 35 years.
To qualify for a down payment of less than 20% on your next rental property, the following criteria must be met:”
- Have a maximum of four units
- Residentially zoned
- Max purchase price of $1,000,000
- Must plan to occupy 1 unit of the property
For first-time real estate investors, we recommend you meet all the criteria. You can still receive a residential investment property mortgage if you do not meet the criteria. However, you will need a minimum 20% down payment. This process is known as “house hacking” because the other one to three units will contribute to your monthly mortgage payments and ideally leave you with some rental property income. If the property has five or more units, then this will bring you into the world of commercial zoning. In this scenario, you’ll need a commercial mortgage with higher interest rates and a stricter qualification process.
B. Amortization Period
Your mortgage amortization is the number of years it will take to pay off your mortgage fully. Generally, real estate investors prefer more extended amortization periods because it reduces their monthly mortgage payments. As a result, a longer amortization will provide you with more profits each month. If your down payment exceeds 20%, you can extend your amortization to a maximum of thirty-five years. You will not need to live in a unit to do this. However, there is an amortization extension fee, and you will likely have higher interest rates than a CMHC-insured mortgage.
C. Mortgage Default Insurance
You must have mortgage default insurance if you have a high-ratio mortgage. The insurance protects your mortgage lender if you default on your mortgage. You must purchase a property with four or fewer units valued below $1 million and live in a unit for a year to receive the insurance. You will not need mortgage default insurance if your down payment exceeds 20%.
D. Claiming Mortgage Payments On Rental Property
You can deduct mortgage interest payments to lower your taxable income in Canada. However, you can only do this with investment properties, not primary residences. You must factor out your proportionate square foot percentage from the deduction if you live in a unit.
E. Rental Property Mortgage Requirements
It can be easier to qualify for a rental property mortgage in Canada. This is because you can use some of the rental income you are receiving in the future to meet requirements. You will always need the standard required documents to purchase a property in Canada. However, specific to investment properties, you will also need proof of tenants and residential or commercial zoning documentation. Your mortgage lender will use this information to calculate your debt coverage ratios. They will also make sure you meet the minimum credit score requirements. Your lender will use one of three different methods to calculate your debt coverage ratio. Each lender uses a different method which is why they may decline your mortgage while another approves you. For the best chance of approval, understand which ratio works best for you and find lenders that use this calculation method. A mortgage broker could even handle this for you.
The three most popular methods are:
1. Rental inclusion
This is the most common method for purchasing residential investment properties (four or fewer units). It shows the percentage of your income that pays off debt and property expenses. To qualify for this method, half of your forecasted rental income will be added to your gross income. As a result, a lower ratio is better. Lenders prefer your rental inclusion ratio to be below 32% to qualify for a mortgage.
2. Debt coverage ratio
Also known as the Debt Service Coverage Ratio (DSCR), this metric is commonly used for commercial real estate mortgages. The DSCR shows how many times your rental profits can pay off your mortgage payments. If your investment property has five or more units, your lender will likely use this ratio to assess you. A higher ratio is better because it shows you can make debt payments. Mortgage lenders require your DSCR to be at least 1.10. However, higher ratios will help you get better mortgage rates.
3. Rental offset
This is another method used when assessing residential investment properties. Although less frequently used, it may help you if you can’t qualify for a mortgage using the rental inclusion method. The theory behind the rental offset method is that your rental income will offset some of the costs of your property. As a result, your gross income is less important because you will need to pay fewer expenses with your salary. A lower ratio is better because it shows less of your income goes towards paying for property maintenance costs. The rental offset percentage ranges between 50% - 70%. For example, a 50% offset percentage means half your rental income pays property expenses. Lenders prefer a rental offset ratio below 32% to qualify for a mortgage using this method.
If you need help understanding more about how you can refinance your mortgage, reach out to Boychuk Mortgage Group, today! We are a dedicated and accredited mortgage brokerage in Burnaby, British Columbia. Given our expertise in the industry, we inform you about the various types of home purchase and improvement mortgages so that you can make a wise decision based on your unique situation.