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* Subject to change without notice *OAC *Some Underwriting Restrictions Apply
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7 YearFixed2.99%
10 YearFixed3.54%

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Mortgages aren’t just for those who intend to occupy the home they are purchasing; they are also available to individuals who purchase real estate as an investment. Even buyers with the capacity to pay cash for their purchase will often utilize a mortgage to increase the rate of return on their investment (explained further below).

Do guidelines change for mortgages on rental properties?

Yes they do! In general lenders see rental properties as carrying more risk than when a borrower actually occupies the home as their primary residence. A borrower will normally go to greater lengths to make payments on the home they occupy with their family whereas investors normally do not have the same commitment on a revenue property. The result with most lenders will be tighter guidelines and policy for income producing real estate.

Examples of common policy regarding mortgage financing on rental properties:

  • Mortgages requiring mortgage default insurance must be met with a 20% down payment (This is now Canadian Law)
  • Down payment requirements may be as much as 25% to 35% with some lenders
  • “Assignment of Rent” will likely be registered against the title to the property which allows a lender to collect the rent payments if the borrower is in default
  • Debts service calculations will sometimes only allow for 50% to 80% of the rental income to be used to offset expenses.

For example: If you collect $1,500 per month the lender may only allow $750/month (50% of the rent actually being collected) to be included as income towards your debts. This is why borrowers have the misconception that they can afford more mortgage debt than what they are actually able to qualify for using lender guidelines

  • Though you may not have any repairs or vacancy in your first year of ownership, or even expect to have any in the near future, some lenders will have a fixed portion of your annual income that must be deducted for vacancy and/or repairs.

For example: Annual income of $18,000 may be subject to a 5% deduction for Vacancy which would equate to $900 less income to offset the debts being serviced by the borrower. The same my be applied for repairs, and/or property management expense

  • For an investor with multiple properties the lender may require a DCR –Debt Coverage Ratio- of 1.2. What this means is that your revenue exceeds the expenses on your rental portfolio by 20%.

For example: If your annual income on your rental property is $18,000 per annum and expenses are $15,000 per annum, this could be expressed as a ratio that would look like $18,000/$15,000 (Revenue/Expenses) and result in a quotient of 1.2 which would meet the minimum for this property

Why mortgage my rental property if I can pay cash? 

The two most common answers are to “leverage” and to increase “rate of return” on your investment, but, of course, we can’t forget to mention the other common reply which would be for “tax strategy”(offsetting income with expenses).

If an investor had $400,000 to spend on a revenue property and they found a property to purchase for exactly $400,000 they would be able to purchase that property with cash and forego the need for a mortgage. They may also consider that a 35% down payment would allow for a surplus and this would avoid having to use all $400,000 on this one investment.

Assume:         -Yields annual rent of $24,000 per year

-Annual expenses $4,000 before interest and tax expense.

Option 1. No mortgage and cash investment $400,000
  • Rate of Return would be equal to: ($24,000 – $4,000)/$400,000
  • 5% Return on initial investment before interest, taxes, and depreciation
Option 2. Mortgage with 35% down payment and cash investment of $140,000
  • $400,000 purchase price less 35% down payment of $140,000 leaves a mortgage amount of $260,000
  • Rate of Return would be equal to: ($24,000 – $4,000)/$140,000
  • 14% Return on initial investment before interest, taxes, and depreciation

***More Discussion***

  • It could also be noted that by mortgaging the rental property the result is a remaining $260,000 that can be used to diversity the investors portfolio with investment in additional properties and/or other investments instruments.
  • Mortgaging this purchase at 65% loan to value would allow this investor to acquire an additional two properties (assuming a slightly lower list price on one of them) which spreads risk between multiple properties versus just one, and increases cash flow