Posted by John Doe
If you have recently come into some money or would like to invest your hard-earned money into a lucrative business venture, then investing in property may be a viable solution. However, an investment property mortgage in Canada is more complicated than the conventional mortgage you would take out on your main home.
Your financing options for an investment property mortgage will vary greatly depending on whether you are planning on actually living in one of the units that you have invested in, as well as the total number of units in the complex. Here, we will be focusing on investment property mortgages in Canada and what you need to know before you decide to invest in a property like this
Number of Units Can Affect Your Mortgage
First and foremost, you should look into the total number of units that the property you are investing in has. Perform the necessary due diligence, as you do not want to spend your money frivolously when looking for an investment property.
The good news is that the financing options at your disposal will only vary slightly in complexity if the property has between one and four units. Such a building will be considered as zoned residential.
In other words, a property with one to four units will come with similar financing options and qualification criteria as a mortgage that you obtained for your main residence. However, if the property you are considering has five or more units, then it will usually be considered a zoned commercial property. This means you will be required by your lender to take out what is known as a commercial mortgage instead of a residential mortgage.
The biggest difference between a residential mortgage and commercial mortgage is that a commercial mortgage has more stringent qualification criteria, and the interest rates also tend to be significantly higher as well.
Living-in vs. Living out
The second factor that will greatly influence your financing options and qualification criteria is whether you are planning on living in one of the units in the building you plan to invest in. If you decide to live in one of the units, then the building would be deemed an owner-occupied property.
If you decide to rent out all of the units and continue to live in another property, such as your initial home or dwelling, then the investment property would be considered a non-owner occupied property.
Down Payment Rate Differences
Interestingly, since April 19, 2010, people living in this country have been required to place a down payment of at least 20% on investment complexes that are considered non-owner occupied. However, the down payment amount on an owner-occupied property can vary greatly, depending on the total number of units.
For instance, if you were to invest in an owner-occupied property with one to two units, then you can place a down payment for as low as 5%. However, if you decided to rent out all the units, then you would have to place a down payment of 20%.
As for an owner-occupied domicile with two to four units, the down payment would be double that of a one to two-unit owner-occupied property, while the down payment for a non-owner occupied property with two to four units would be 20%.
However, as of February 15, 2016, Canadians who invest at least half a million dollars into their income property would need to place a down payment of at least 5% for the first $500,000 if it is an owner-occupied property. Subsequently, the owner would need to put down 10% of any amount that exceeds half a million dollars.
Differing Mortgage Rates for Income Properties
As long as you are able to put down the minimum required down payment on the property and can meet all of the qualification criteria, you should qualify for the same mortgage terms and rates that we have discussed thus far, which also includes adjustable, variable, and fixed mortgages. However, it is also important to note that there are some lenders in Canada who refuse to offer investment property mortgages of any kind.
More often than not, it is the smaller lenders that will refuse to offer this type of mortgage, albeit some may be flexible if you decide to actually live in one of the investment units yourself. If you do decide to go with one of the smaller lenders, then you should be prepared for a small premium hike to your mortgage (i.e., 0.40%).
As for closed mortgage rates, these will fluctuate from month to month and year to year, and the lender you choose will determine the rate that you will be expected to pay. For instance, you may be able to obtain a fixed, two-year mortgage with a rate as low as 2.6%, or pay as much as 6.6% for an eight-year fixed mortgage with another financial enterprise.
On a final note, if you put down at least 20% on the property, you may be able to qualify for a 30-year amortization period. However, doing so will likely also lead to a small hike to your premium, likely around 0.25%.
If you would like to learn more about how to invest in income property in Canada, call 866-307-074 or contact us here.