Investment Property Mortgages: What Buyers Need To Know

| May 1, 2014

investment property mortgagesFinancial security is a concern for everyone. One of the best ways to secure your financial future is to make wise investments. Today, investment properties are a great option when it comes to investing your money.

Becoming a landlord comes with many benefits. Not only will you generate income, the tax breaks that are associated with owning an investment property will also pay off in the long run.

Purchasing an investment property is like taking on a full-time job. This type of investment should be avoided by anyone who isn’t capable of making a long-term commitment. Before you make the decision to purchase an investment property, there are some things that you should know. It is nothing like buying your principal residence.
If you’re already a home owner, you’re familiar with the rules associated with buying a property. However, when you’re purchasing an investment property, the rules change. The following information is designed to help make the purchase of your investment property a little easier.

Down Payment and Maximum Loan-to-Value Rates

The initial step in purchasing your investment property will be to make a down payment. In Canada, the required down payment for a primary residence is 5%. The down payment that is required for the purchase of an investment property is contingent upon two things: the number of units in the property and owner occupancy status.

As you can see, not occupying one of the units increases the amount of your down payment. In this case, the number of units in the property isn’t relevant. The maximum loan- to-value rate also decreases with that decision.

Insurance Premiums

The Canadian Mortgage and Housing Corporation’s rules for insuring investment properties are also different than those that apply to a primary residence. A 20% down payment on a primary residence does not require an insurance payment. Insurance premium rates for an investment property vary based on whether or not you will occupy one of the units.
For owner occupied investment properties, a down payment 20% or higher, puts you in position to extend the amortization period for another 5 to 10 years. The amortization period is the also referred to as the ‘life of the loan’. However, each additional 5 years will add another .20% to your premium.

For non-occupied investment properties, there is a mandatory 20% down payment. Your decision to not reside in one of the units will cost you more in insurance. The same rule applies in terms of an amortization period of 30- 35 years. Each additional 5 years will increase your premium by 20%.

Determining Your Loan Amount

One of the few times that owner-occupancy will not matter is when it’s time to determine the amount of your loan. At this point, there are only three things that matter. The most important is how much income will be generated by your investment property.

The first thing that will be taken into consideration will be the rental offset. A percentage of your prospective annual income will be offset against the amount of money invested in the purchase of the property. This may include the amount of your mortgage, taxes and other expenses. Generally, the offset ranges between 50 and 70%. Next, your lender will consider rental inclusion. Half of your annual income from the property will be added to your personal annual income. Once this is done, the total amount will be used to perform a ‘total debt service’ ratio. Finally, your lender will perform a ‘debt service coverage’ ratio. Your personal debt will not impact the outcome. The goal is to determine whether or not the income generated from your investment property is sufficient enough to make the mortgage payments.

Investment property mortgages don’t have to be confusing. Basically, if you’re able to make a minimum down payment of 20% towards the purchase of your investment property and meet the requirements of your lender; you are likely to secure the best available mortgage and insurance rates. In addition, the choice to occupy one of the units in your investment property may be just the ticket to optimizing on your investment. is here to help you make smart choices and help with the understanding of investment property mortgages. Speak to a qualified mortgage specialist today for more details.

Share this post: