Posted by John Doe
The housing market continues to stay hot, and interest rates remain low. With all this activity, you may be considering an investment property as a way to diversify your portfolio.
An investment property can be a great way to spread the risk and give yourself consistent returns, but it requires some planning before you can get financing for it. You need to have all of the following information put together before you try to get financing for your new investment property mortgage in Canada:
- Do you plan to stick with one investment property, or do you hope to get into more in the future?
- Can you provide proof of income so the lender knows you can repay the loan?
- How much of a down payment can you provide?
- Do you have details on the investment property, such as the potential market rental price?
What is your long-term plan?
Any potential lender that you approach for an investment property mortgage will want to know your long-term plan. It’s important to be clear on your goals before approaching a lender.
Some things a lender may ask you are:
- Is this your first investment property?
- Do you plan to buy more investment properties in the future?
- If you plan to buy more than one investment property, how do you plan to finance them?
- What is your time frame for holding your investment property?
Coming in prepared to answer these questions will help a lender know what you need. After you’ve established your needs, you can work with your lender to determine the best course of action for obtaining an investment property mortgage.
Provide Proof of Income
You must be able to provide proof of income that you can pay the mortgage. You’ll need to provide the lender with evidence, such as the following:
- Letter of employment and pay stubs, or if you are self-employed, profit and loss statements or other proof of income
- Proof of any other type of income not covered by pay stubs, etc.
- The most recent notice of assessments from the CRA
- Your most recently completed tax returns
There are two other things associated with income that you should keep in mind:
- Your credit score, as this shows lenders if you are a reliable candidate to repay your loans. It may even impact the interest rate you are charged. If you have concerns about your credit score, you may want to take steps to improve it before you apply for an investment property mortgage in Canada.
- How much debt you have. A lender will want to know about all other debt you have, such as other mortgages, car loans, and credit cards. Having debt is part of life, but lenders don’t want to see that you have so much debt that you may have trouble paying down a new mortgage as well.
How much of a down payment can you provide?
You must be able to provide a reasonable down payment before you can even be considered a good candidate for an investment property mortgage. Consider the following factors:
- How much do you have for a down payment? If you are living in the property (owner-occupied), you must have up to 5–10% of the purchase price available as a down payment. If you are not living in the building, you must have 20% of the purchase price available as a down payment.
- You must be able to prove that your down payment isn’t borrowed. You can consider various sources for your down payment, such as a bank account, an investment account, a home equity line of credit (HELOC) on your principal residence, or the proceeds from the sale of another property.
When you are ready to approach the lender, make sure you have all your paperwork in order to prove how much of a down payment you can provide and where it is coming from.
Have Details Ready on Your Investment Property
Your lender will want to know all the details about the investment property before they can consider giving you a loan. You must provide a lender with the following information:
- An expected market rental price that can be received from your property (and can be obtained from an appraiser).
- The number of units in a building. If a building has more than four units, it is zoned as commercial, and therefore you would have to take out a commercial mortgage instead of an investment property mortgage. So, this is critical information to know.
- Other paperwork pertaining to the property such as the MLS listing, an Agreement of Purchase and Sale (if you have one), a lease, and any other applicable waivers.
You’re Ready to Move Forward
You’ve now learned the most critical things to know before trying to get financing for your investment property:
- Your property must have no more than four units or it will be considered commercial, and you will have to get a commercial mortgage. This is harder and more expensive than an investment property mortgage in Canada.
- Knowing whether your investment property will be owner-occupied or not is very important. You can have a lower down payment (5–10%) with an owner-occupied building than with a non-owner-occupied one; in the latter case, you need a 20% down payment.
- You must be able to provide proof of income such as pay stubs, profit/loss statements, Notice of Assessments from the CRA, and even completed tax returns.
- Have a long-term plan in place; know if you plan just to buy this one investment property or plan to buy more in the future.
With all this in place, you are ready to get financing for your new investment property.
Contact Us Today!
This may seem overwhelming, but we are here to help. Not all lenders in Canada offer investment property mortgages, but here at Mortgages Mortgages, we can provide you with the advice and guidance you need to obtain your investment property mortgage.
To learn more about the process of securing an investment property mortgage, call Mortgages Mortgages at 866-307-0747 or contact us here.