Investment Property Mortgages
In Canada, investment property mortgages are different from the type of mortgage you apply for when buying a primary residence. The rules are stricter and the down payment requirements are higher.
Before jumping into being a landlord, here’s what you need to know about investment property mortgages.
How investment property mortgages work
Before choosing an investment property to buy, you’ll need to decide if you will live in the property in any capacity.
If you buy a property with multiple units — a duplex, a house with multiple suites, a home with a carriage house — and plan to live in one unit while renting out the others, you can use a typical owner-occupied mortgage. This may enable you to make a relatively low down payment.
For a property with three or four units, such as a house with a basement suite and a carriage house, or a four-plex building, the down payment must be at least 10%.
For a property with two units, like a duplex or a house with a basement suite, the minimum required down payment is 5% if the property costs less than $500,000. If it costs between $500,000 and $1.5 million, you’ll need to put down 5% of the first $500,000 plus 10% of the remainder.
If the property costs $1.5 million or more, you’ll need to put down 20%.
If you don’t intend to live in this new home, townhouse or condo, you will need to apply for an investment property mortgage, also called a rental property mortgage. In this case, you will need a minimum down payment of 20% of the purchase price.
Qualifying for an investment property mortgage
The application process for a rental property mortgage is more strict than what you might encounter with a standard residential mortgage.
On top of the hefty minimum down payment, you will need to have a good credit score — which may be higher than that required for a standard mortgage.
You’ll also need to prove to the lender that the building will be able to bring in sufficient rental income. You can demonstrate this with either a current lease for existing tenants or current market rental rates for similar properties.
A portion of the income a property generates is generally added to your income for mortgage qualifying purposes. However, you still have to demonstrate that you earn enough non-rental income to cover the mortgage in case your property ever sits vacant..
Not every lender offers rental mortgages. In Canada, they’re most commonly found at major banks and large alternative lenders.
Getting the best interest rate on an investment property mortgage
Maximizing the profit of your investment property requires cutting as many expenses as you can. There’s no bigger expense than the mortgage you’ll use to buy it.
Some methods for scoring the best rate on your investment property mortgage include:
Making a larger down payment. Adding to your down payment will reduce the risk faced by your lender, who might reward you with a more favourable rate.
Working with an investment-focused mortgage broker. A broker with investment experience should be able to connect you with lenders that offer loans to meet your needs.
Being location-sensitive. Lenders typically want to be involved with investment properties that rent consistently and resell easily. Choosing a rental property in an undesirable or remote area might increase a lender’s risk — and your mortgage rate.
Tax benefits of investment property mortgages
Tax deductions
A number of investment property expenses can be deducted from your rental income, including mortgage interest, property taxes, insurance, maintenance and upgrades, property management and potentially utility bills (if included in rental costs).
Deductible losses
As well as being able to claim expenses, you may be able to claim a tax deduction for any financial losses. This means if your investment property expenses exceed your rental income, you might be able to deduct that loss from your other income.
Risks associated with investment property mortgages
Vacancy. If you depend on rental income to make your monthly mortgage payment, a long vacancy could lead to foreclosure.
Rent disputes. You might run into difficulties paying back your mortgage if a tenant feels justified in withholding rent.
Maintenance. Providing tenants a safe, comfortable place to live means performing consistent maintenance, and they may put added pressure on your finances. You might be able to delay repairs on your own home, but doing so on a rental property could lead to delayed rent payments or vacancy.
Damage. If tenants damage your property, it might be appraised for less than you paid for it. Reselling a devalued property — or paying to bring it back up to snuff — could result in a major financial loss.
Types of investment properties
Residential properties
A residential investment property is a dwelling that you rent out to a tenant or fix up and resell. Common types of residential properties suitable for investment include:
Single-family homes.
Apartments.
Condominiums.
Townhomes.
Cottages.
Cabins.
Buildings with up to six units — sometimes known as multi-family properties — are also generally considered residential, though it’s important to check your local zoning to be sure, as some municipalities have lower thresholds.
Additionally, some banks may have their own rules around how many units a building can have and still qualify for a mortgage as a residential property.
Commercial properties
A commercial property is a building used for business purposes, such as a retail store or an office building. However, a residential building with more than five or six units can also be considered commercial. Again, check your local zoning rules to be sure.
Commercial properties tend to have more income-generating potential, but may require more maintenance and higher costs. Commercial mortgage criteria is also tougher to meet.
Mixed-use properties
A mixed-use property tends to have both residential and commercial elements, like a building with a retail store at street level, offices on the second and third floors and apartments or condo units the rest of the way up.
Frequently asked questions
Do you need to put 20% down on an investment property in Canada?
Do you need to put 20% down on an investment property in Canada?
Yes. You’ll need to make a down payment worth at least 20% of an investment property’s sale price to qualify for a mortgage at most lenders in Canada.
What’s the lowest down payment I can make on an investment property?
What’s the lowest down payment I can make on an investment property?
If you live in one unit of a small investment property — the top half of a duplex, for example, or the main floor of a home that has a basement suite — the smallest down payment you can make is 5% of the purchase price. A 5% down payment only applies to properties worth less than $500,000.
DIVE EVEN DEEPER
Kurt Woock
Clay Jarvis
Clay Jarvis