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Investment Property Mortgages |
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Are you looking to purchase rental property?
Purchasing a residential investment property is more complex compared to purchasing an owner-occupied property. This type of mortgage is also considered higher risk. Many lenders will not finance investment properties. Secondly, the treatment of rental income from the property will vary widely from lender to lender. Thirdly, owner-occupied rental income (such as a house with a basement suite, duplex, triplex and fourplex property) is treated differently from an investment property which is not partially owner-occupied.
Here are some of the ways, lenders treat the income from a rental property
A Percentage of rental income (usually 50%) is added to the borrower's income
This is the more conservative approach to using rental income for qualification purposes. This is also the most common approach used by mainstream lenders. For example, if the property can rent for $1000 per month or $12,000 per year, lenders will add $6,000 (or 50% of $12,000) to the borrower's income to qualify the mortgage. As it often happens with mortgages (especially those in the Metro Vancouver area) that the mortgage payments are higher than the rent income. With this method, qualifying for a mortgage to purchase a rental property will require a much higher income for the borrower.
Rental Offsets (50% - 100%)
A more aggressive approach is using a rental offset. With this approach, the rental income is treated as a deduction from your mortgage payments. The percentage rental offset may vary from between 50% to 100%. This will depend on the lender's policies, whether the mortgage is an insured mortgage, whether this property is owner-occupied and of course, your overall credit.Here's an example using an 80% rental offset. Say, for example, that a property's carrying costs (consisting of principal, interest, property taxes and heat) is $1,100 per month and the property can rent for $1,000 per month. In this scenario, the lender will use 80% of the rental income of $1,000 or $800 and deduct this from the carrying costs of $1,100. This results in a negative cash flow to you of $300 per month. If you can afford to make this extra payment, you can easily qualify for this purchase.
Example
Here is an example that shows you the difference between the two methods:|
50% Rent Add back |
80% Rental Offset |
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| Gross income | $60,000 | $60,000 |
| Other debt payments | $500 per month | $500 per month |
| % downpayment | 20% | 20% |
| Max. Purchase Price | $451,000 | $671,000 |
You can see that a rental offset can allow a borrower to purchase a much higher value property.
How much do you need for a downpayment
In October 2007, the Canadian Mortgage and Housing Corporation (CMHC) announced that their high-ratio mortgage insurance programme. This allows investors to purchase an investment property for with zero down payment. This programme is for small rental properties with 1-4 units only.
"My job is done when you know your options"
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