If you’re planning to buy real estate as an investment and rent it out rather than living in the property, then keep in mind that lenders view investment properties differently than owner-occupied properties.
For starters, the mortgage best rates are available for owner-occupied, income-qualified deals so you will likely pay a higher interest rate on an investment property. Twenty per cent is the absolute minimum down payment you’d need for an investment property and many lenders still require the mortgage to be insured. For owner-occupied properties, you can secure a mortgage with as little as 5 per cent but lenders want investors to put more money down.
Most lenders–including TD and all the monoline lenders I work with–will insist on mortgage loan insurance if you’ve paying a down payment below 25 per cent on an investment property (for owner-occupied, the standard is 20 per cent). A few lenders, notably Scotia and National Bank, will allow an ununisured mortgage at 80 per cent loan-to-value (in other words, a 20 per cent down payment), but they will include a small rate premium.
Next, keep in mind that lenders have changed the way they view rental income and they now include less rent as income than they have in the past. If you own multiple properties, you should know that the way each lender calculates rental income is different. Some will only accept rent as income if that income is declared on your tax returns and will ask for your T1 Generals to show the breakdown. They may ask for statement of real estate rentals. Even with lease agreements, if your income is not reported, then it can’t be used to qualify you for the mortgage.
However, some lender are more lenient and will allow lease agreements or even a schedule A (estimated rent from an appraiser) if the place is rented without a lease or if the property is currently owner occupied but will be rented once the clients move into their new home. If you rent out a property that was previously owner-occupied and take the loan to another lender at renewal, it would be treated as a rental property and you would need to qualify based on that lender’s criteria. If you stay with the same lender and haven’t had any late or missed payments, the lender would simply offer you new rates for renewal.
While it might be more challenging to qualify for a mortgage on an investment property, many real estate investors find these hurdles ultimately worthwhile because they’re able to build long-term financial security in the process.