Investment Property Mortgages - 9 Need-To-Knows

Wondering about investment property mortgages? Buying an investment property is a popular way many Canadians are investing their money. With the GTHA growing and demand increasing, Canadians are taking advantage of the cash flow coming from investment properties. It is important to note however, that taking out a mortgage on an investment property is not as simple or straight forward as is taking out a mortgage on a primary residence. When it comes to this topic, there are many different sub-topics. Here are some common questions and answers for you to get started living life on your terms!

What are the investment property mortgages?

Investment property mortgages refers to a specific type of mortgage that is given to potential investors to be able to purchase commercial as well as residential properties. These types of mortgages are generally more difficult to qualify for compared to general mortgages. The federal government also has few loan programs to help investors purchase investment properties. Because of this, many investors look to private lenders as an alternative.

What are the general down payment rules? Do the same apply for investment properties?

The general down payment rules for owner-occupied properties as of February 15^th 2016, are 5% down for a property that is priced less than $500K. If the house is $500K to $999,999, it would be 5% down for the first 500K, then 10% for any amount over that. If you buy a property that is more than a $1 million, you will need to have a down payment of 20%.

This is also dependent on if the property is owner occupied.

If you have 1-2 units and plan on living in one of them, we can go by this general guide. Alternatively, if you have 1-2 units and do not plan on living in any, the down payment will be at least 20%.

If you have 3-4 units, and plan on living in one, the down payment will be 10%. If you have 3-4 units but do not plan on living in any of them, you will be paying the same down payment of 20%.

What are amortization periods like for investment property mortgages?

There have been recent changes around amortization periods. Up until 2006, most amortization periods for investment property mortgages involved a 25 year period or even less.

Since then, amortization periods can go all the way up to 35-year periods.

With increasing housing prices, amortization periods were extended to help housing affordability. By stretching out the payment period, home owners have smaller payments to make and make it easier for them to qualify for home ownership.

Although this sounds peachy perfect, having longer amortization periods means that home owners will end up paying more interest. This means most of the home owners monthly payment will go towards the interest, rather than paying off the property. And this can be a little unnerving for a home the owner won’t even be living in.

Are mortgage rates higher for investment properties?

In short: yes. Why? Because Investment Properties tend to involve more risk for the lender. Investors can get a mortgage insurance to bring the rate down, however getting an insurer hasn’t been necessary since the Government of Canada made it necessary to have a 20% down payment for investment properties.

Should I go to a bank or a mortgage broker?

When it comes down to it, it depends most on who will have your best interests at heart. It is important to go with someone who you can trust and is the most knowledgeable about the topic of investment property mortgages.

The advantage of going with a bank is that you may already have a relationship with them, making it easier to know who you can trust! Going with a bank also makes approval processes for mortgages really efficient, as the bank may already know the client’s financial history.

Banks are also great at providing a large-scale view about their range of services. However, because banks are so used to working on so many different projects, they might not have staff that are knowledgeable on investment properties specifically.

Going with a mortgage broker saves time as many think of it as a one stop shop for investment property mortgages as the clients don’t seek out multiple quotes from lenders themselves, it’s what the brokers do! Additionally, mortgage brokers tend to be able to get better rates than what is traditionally offered from many well-known banks.

Mortgage specialists deal with investment mortgage properties on a daily. Because of this, they may be able to arrange a mortgage for clients that are having problems being approved by a bank (this is known as B Lending). They are extremely specialized in this department, compared to banks that take on so many tasks they become a jack of all trades (but a master of none).

Some great questions to ask in your first meeting with the lender:

Do you currently work with active investors? How many years of experience do you have?
Do you own any rental property?
What lenders do you work with?
Can I speak to a recent formal client of yours?

The biggest factor to consider is what works best for you. Banks are a popular source for investment property mortgages; however, the popularity of mortgage brokers have gone up in recent years. At the end of the day, it just matters who is the most knowledgeable, trust worthy, and who is on your team!

For a quick and helpful video on mortgage brokers vs. banks, click here!

How do I qualify for an investment property mortgage?

To qualify for an investment property mortgage, an investor will need the following things:

Good Credit: it’s important to show a great credit record to get the best mortgage options.
Proof of a Consistent Income: the lender will want to know how the investor will be paying for the mortgage. This can be shown through pay stubs, a letter of employment, financial statements and/or recent T1s.
Proof of Being Able to Make a Significant Down Payment
Proof of Emergency Funds
Details of the Existing/New Property
1. New Property: this needs to be shown in the form of the MLS listing, Agreement of Purchase and Sale or a letter from an appraiser that will confirm properties up to date market rental price
2. Existing Property: mortgage and property tax statements and lease agreements if the property is currently rented. The best-case scenario is to show that there is immense cash flow coming from their properties and that you can cover costs on a consistent basis.

Many times, mortgage lenders/brokers will need additional information, these are just the basics!

What are the methods for debt ratio calculations?

No one is claiming that qualifying for an investment mortgage property is easy! To qualify for one, lenders need to make sure that you are able to make the monthly payments. There are 2 ways that they calculate debt ratios, they can’t skip the details!

Total Debt Service Ratio:
- This is a percentage of your gross income and goes by the following equation:
  - TDS = (Principle + Interest + Taxes + Heat + Other Debts – (Rental Offset% x Rental Income)) / Gross Annual Income
- Borrowers that have a higher TDS are likely going to struggle meeting their debt obligations compared to other property owners who have lower ratios. Many lenders do not give mortgages to those who have a TDS ratio over 43% as they ideally prefer a ratio of 36% and smaller.

Gross Debt Service Ratio:
- This is a comprehensive look at all of the investors monthly (or annual depending on what is needed) housing expenses. Banks and mortgage brokers also use the investors GDS percentage to determine how much they would be able to afford to borrow.
  - GDS = Principle + Interest + Taxes + Heat / Gross Annual Income
- Borrowers that have a GDS 28% or less are what is considered ideal for qualifying for an investment property mortgage.

For more information on debt ratio calculations, we recommend looking at this CMHC site to get a great general breakdown!

What is a mortgage insurer? Do I need one for my investment property mortgage?

Since April 19^th 2010, Canadians legally need to make a 20% down payment for all investment properties. And because of this, it is no longer required to use a mortgage insurer as the investor is paying the minimum required amount.

If you are referring to a getting a mortgage insurer for personal properties, yes, you will need it if your down payment is less than 20%! However, this is a topic for another article… you’re in the clear for now!

How do I move on from here? Where do I get more information about topics like this as well as other investing need-to-knows?

For us, it’s simple. Keep investing in financially beneficial assets.

We are big believers that investing in properties that have great cash flow is the ideal way to thrive over the next several years.

Learning not only how to get involved in real estate, but keep up with current trends and strategies, has helped us benefit off of a gold mine that most don’t even know exist and help us consistently live life on our own terms.

With historically low interest rates and hundreds of thousands of people pouring into the Greater Golden Horseshoe area over the next several years, we believe there will be continued demand for good properties in good areas.

To learn the exact strategies we’re using with hundreds of investors right now, you can download a free digital copy of our book Income For Life here.

This book normally sells on Amazon.ca for $24.95, but we’re sharing a digital copy for free because we want as many Canadians as possible to learn how to take advantage of the population growth in the GTHA.

Here are what just a few of our investors have shared about working with us...

Our journey with Rock Star began four years ago. As seasoned real estate investors, we were looking for a way to fine tune and grow our portfolio. We found that working with Rock Star provided us the advanced level information about investing in the right type of property in the right area, charge the right amount of rent, and other useful pieces of the puzzle.! Thanks Rock Star!
- Allison

Rock Star rocks! We have had the pleasure of buying two properties with Rock Star and look forward to growing our portfolio with you guys. Thank you for helping novices like ourselves understand how easy buying homes can be. Our experience with Rock Star makes us very happy to recommend them to our friends and family!
- Jen

Rock Star real estate has played a critical role in starting our real estate investing career. From all the classes offered, to the member events, it is a great network to be a part of for anybody looking to get started in real estate investing. It is great how Rock Star assigns you a coach right from the beginning to make the process much smoother and less stressful. We are very happy to be members of the Rock Star Real Estate community.
- Peter