Buying an investment property is a popular option for Canadians looking at different ways to invest their money. However, unlike the mortgage you took out on your principal residence, financing an investment property is a little more complex. The number of units in the building and whether or not you’ll be occupying one of the units are the two major components that control what your financing will look like. Let’s take a look at how investment property mortgages work in Canada.
What to Expect
Down Payment
Maximum Amortization Period
Mortgage Default Insurance
Investment Property Mortgage Rates
Qualification Criteria
Debt Ratios
Overcoming The Challenge
When you start shopping around for an investment property, the first thing you need to consider is the number of units your building will have. Most buildings with 1-4 units are zoned residential, so the qualification criteria and financing options from lenders are only slightly more difficult than that of a mortgage similar to what you have on your principal residence. However, buildings with 5 or more units are zoned commercial, so a lender would require that you take out a commercial mortgage on it. With a commercial mortgage, the qualification criteria is even tougher to meet and interest rates are often much higher.
If it’s a multi-unit property, the second thing to consider is if you, the owner, will be living in one of the units or not. If you will be occupying one of the units, the property would be considered owner-occupied. If all of the units will be rented out, your property would be considered non-owner occupied. The major difference between the two is how much of a down payment you need to make.
Pre-Approval
Start by finding out your approval amount with us, including incentives and programs available for you.
House Hunting
The search for the perfect home begins with the right realtor that can work with your best interest in mind.
Funding
We co-ordinate with the bank and lawyer to get your mortgage funds issue in order to buy the home!
Closing
Your Lawyer works with sellers, lawyers, banks & many others to legally finalize your purchase.
Understanding the way of Investments
Down Payment
Since April 19th, 2010, Canadians have been required to make at least a 20% down payment on non-owner occupied investment properties. Use the following chart to see the minimum down payment both owner and non-owner occupied investment properties require.
Units: 1-2 | Owner-Occupied?: Yes | Down Payment: 5% | Max Loan-to-Value: 95%
Units: 1-2 | Owner-Occupied?: No | Down Payment: 20% | Max Loan-to-Value: 80%
Units: 3-4 | Owner-Occupied?: Yes | Down Payment: 10% | Max Loan-to-Value: 90%
Units: 3-4 | Owner-Occupied?: No | Down Payment: 20% | Max Loan-to-Value: 80%
As you can see, non-owner occupied investment properties require at least a 20% down payment. However, if you plan on living in one of the units, you can put down as little as 5-10%, depending on the total number of units in your property.
As of February 15th 2016 if the purchase price is over $500,000, the minimum down payment for owner-occupied properties is equal to 5% of the first $500,000 plus 10% of any amount over $500,000.
Mortgage Default Insurance
Investment properties with 1-4 units are eligible for very competitive mortgage rates, as mortgage default insurance exists to minimize the risk to lenders. When reviewing the charts, note that it's rare to find yourself in a situation where you would need to purchase mortgage default insurance after you make a down payment of 20% or more, but it's not impossible. Depending on your financial situation, your lender may require it, in order for you to access their best mortgage rates and terms.
Qualification Criteria
To qualify for an investment property mortgage, you will need to provide your lender with:
the Agreement of Purchase and Sale
proof of a sizeable down payment
proof of steady income, usually in the form of a job letter and pay stubs or Notice of Assessment for two years of T1 Generals (self-employed)
proof of existing renters, if there are any
zoning documentation to prove you are purchasing a residential property and not a commercial property
Your lender will also need to run a credit check and calculate your debt coverage ratio.
Maximum Amortization Period
If you put down anything less than 20% on an investment property, your maximum amortization period will be 25 years. However, if you put down 20% or more, you may qualify for a 30 or 35-year amortization period. This is one aspect of an investment property mortgage where it does not matter if the property will be owner-occupied or not.
Investment Property Mortgage Rates
So long as you meet the qualification criteria and can make at least the minimum down payment on your investment property, you should qualify for the same mortgage rates and terms as you see on our site – these include fixed, variable and adjustable rate mortgages.
It’s important to note, however, that some smaller lenders don’t offer investment property mortgages at all - that is, unless you are going to occupy one of the units. If you can find a smaller lender to work with, be prepared for them to add a small premium to the mortgage rate, such as +0.30 per cent.
Debt Ratios
In order to qualify for an investment property mortgage, a lender must evaluate your ability to meet your monthly debt obligations and expenses. There are essentially three different methods - or debt ratio calculations - lenders employ for investment property mortgages.
The first two methods are extensions on the basic Gross Debt Service Ratio (GDS) and Total Debt Service (TDS) Ratio calculations used for a principal owner-occupied residence. These measure the maximum debt you are allowed to carry as a percentage of your income. GDS is the percentage of your gross income needed to cover housing expenses. TDS is the percentage of your gross income needed to cover housing expenses plus other debts.
The basic formulas for GDS and TDS are as follows:
PITH = Principal + Interest + Property Taxes + Heating
GDS = PITH / Gross Income
TDS = (PITH + Other Monthly Debt Repayments) / Gross Income
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