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If you are looking for a safe investment option for your money, investment properties can prove to be low-risk with high returns. This is because investment properties offer you a rare opportunity to invest in a proven equity building asset using a mortgage to pay for up to 80% of the upfront purchase price. When you invest in a property, you use your tenants’ rent to pay for your mortgage, while equity in your property continues to build.
Although you will face a more complicated process than you did for your home mortgage, it is well worth the effort if you have an entrepreneurial spirit. The two main factors in financing your property investment are the number of units in the building, and if whether you will live in one of the units. Therefore, the number of units plays an important role when shopping for an investment property.
In most cases, buildings with 1-4 units will be zoned as residential. In this case, the qualification criteria and financing options are not quite as complex. They tend to be reasonably close to the mortgage application process you experienced for your principal residence.
If you are looking at buildings with five or more units, they will be zoned commercial. This means lenders require investors to apply for a commercial mortgage. The commercial mortgage qualification criteria are not only tougher but also, more often than not, will come with higher interest rates.
For multi-unit properties, you have the option to choose to live in one of the units. This is a good option, as your property would then be considered owner-occupied. Otherwise, the property is considered non-owner occupied, which will affect the amount required for a down payment.
As of April 19th, 2010, investment properties require a down payment of at least 20% in Canada for non-owner-occupied properties. A breakdown of the owner and non-owner-occupied investment properties is as follows:
Owner-occupied with 1 to 2 units requires a 5% down payment and 20% for non-owner occupied
Owner-occupied with 3 to 4 units requires a 10% down payment and 20% for non-owner occupied
As mentioned, if you choose to live in your investment property, your down payment can be as low as 5% to 10%, based on how the number of units. On February 15th, 2016, changes were made to requirements for investment properties with a purchase price of over $500,000. The minimum down payment for owner-occupied properties is now 5% for the first $500,000 plus 10% of any amount over $500,000.
As with your home property, mortgages for investment properties are available with different mortgage rates and terms, including fixed, variable and adjustable-rate mortgages. You have to apply for your mortgage and meet the qualification criteria including meeting the minimum down payment requirements to qualify.
Working with our mortgage brokers is your best option for finding an investment property mortgage as some smaller lenders don’t offer investment options unless you plan to live in one of the units. As well, smaller lenders will charge a premium to their mortgage rate for investment property mortgages. Our mortgage brokers will search up all of your options and help you avoid paying unnecessary premiums.
Keep in mind if you put down less than 20%, you will have a maximum amortization period of 25 years. For down payments of 20% or more, you can qualify for up to a 30 or 35-year amortization period whether you live in a unit or not.
To qualify for an investment property mortgage, you will go through a very similar application process to qualifying for your home property. You will need to provide us with the following:
The Agreement of Purchase and Sale
Proof of your down payment available based on the qualifying criteria
Proof of steady income or Notice of Assessment for two years of T1 Generals if you are self-employed
Outline for all current renters, if there are any
Zoning documentation showing this is either a residential or commercial property
A credit check will be run, and your debt coverage ratio will be calculated. As with any loan, you will have to prove you can meet your monthly debt obligations and expenses. The debt ratio calculations used would include:
Gross Debt Service Ratio (GDS): the percentage of your gross income needed to cover your housing expenses.
Total Debt Service (TDS): the percentage of your gross income needed to cover housing expenses plus all of your other debts.
As well, there are two extensions of the basic GDS/TDS calculation used for investment property mortgages, which also consider your potential rental income. This is because the rent will help contribute to your ability to cover your mortgage payments.
Rental Offset: This is usually 50% to 70%. If your rental offset is 50%, then 50% of your total rental income for the year goes towards offsetting expenses. You will never get a 100% rental offset because lenders consider issues such as vacancies and unpaid rent.
Rental Inclusion: This is 50% of your annual rental income added to your actual income to help qualify you.
Since the rent generated from your property is the primary source of repayment for your mortgage in most cases, the final qualification method is based on a cash flow assessment. The Debt Service Coverage Ratio (DSCR) is calculated using the Net Operating Income (NOI) from your property, which is divided by the annual mortgage payments (principal and interest). NOI is the total income of the property less operating expenses. In order to qualify, your DSCR ratio should be higher than 1 to show your property will generate the required income to cover your debt. You want the highest ratio possible to obtain a loan, but also to show how your investment will work to earn your income.
During this process, you will have to prove the stated income and expense data are accurate, supported and reasonable.
If you would like more information on investment property mortgages, speak to our mortgage brokers today.
Individuals can purchase a second home for relatives and family members with as little as 5% down on purchases less than $500,000, and are on a rent free basis.
Or if you are looking at purchasing the vacation home you’ve always wanted, we can help you with that too.
Call us today to discuss the details.
Individuals who are Canadian citizens, permanent residents including newcomers, self employed borrowers and corporate borrowers are able to purchase an investment property with a minimum of 20% down payment.
An incorporated company that is used for holding investments, such as real estate.
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