Mortgages for Rental Properties
Investing in rental properties in Ontario can be a lucrative venture, but it comes with its own set of challenges, especially when it comes to securing financing. Understanding the ins and outs of these types of mortgages is important for investors looking to get into the Ontario rental market effectively. In this article, we’ll look at the various aspects of rental mortgages, including qualification criteria, down payment requirements, and the treatment of rental income.
Understanding Rental Property Mortgages
Mortgages for rental properties differ from those for owner-occupied residential properties in several key ways. One significant difference is the down payment requirement. While owner-occupied properties may qualify for high-ratio mortgages with down payments as low as 5%-10%, rental properties typically require a minimum down payment of 20%. This higher down payment reflects the increased risk associated with rentals.
Rental Property Criteria
The criteria for rental mortgages in Canada depend on factors such as the purchase price and the number of units in the property. While it’s possible to qualify for a down payment of less than 20%, the property must meet certain requirements:
- Number of Units: The property must comprise of no more than four residential units.
- Purchase Price: The current purchase price should be below $1 million.
- Intended Residence: The buyer must intend to reside in one of the units.
Meeting all these criteria is advisable for novice investors. However, if these conditions are not met, investors may still be able to secure financing but they will have to put a larger down payment.
Owner-Occupied vs. Non-Owner-Occupied Properties
When purchasing a property for personal residence, investors may qualify for lower down payments and more favourable interest rates. However, for non-owner-occupied properties, a minimum 20% down payment is typically required.
Insured Residential Mortgages
Properties where the purchaser resides in one unit and meets certain criteria may qualify for a minimum down payment of 5%-10%, made possible by mortgage default insurance. This insurance, provided by mortgage default insurers, allows for better mortgage rates but requires compliance with insurers rules.
Amortization Period
The mortgage amortization period, or the time it takes to pay off the mortgage fully, plays a crucial role in determining monthly payments. Investors often prefer longer amortization periods to reduce monthly payments and improve cash flow. While the maximum amortization period for properties with CMHC insurance is 25 years, longer periods may be available for higher down payments, but with higher interest rates. With the latest changes that were announced recently there are some exceptions that will allow for 30 year amortization. We will cover that in more detail in a future article.
Mortgage Default Insurance
In Canada, mortgage default insurance is mandatory for high-ratio mortgages (where the down payment is less than 20%). This insurance protects lenders in case of default but comes with additional fees. Homeowners can participate in this insurance program if their property meets certain criteria.
Rental Property Mortgage Requirements
Qualifying for a rental property mortgage involves assessing future rental income and meeting standard documentation requirements. Lenders may consider existing rental agreements or market rent appraisals to determine rental income.
Rental Income Treatment
Rental income can be included in borrower earnings either as gross rental income or net rental income, affecting debt service ratios. Gross rental income inclusion may vary, while net rental income method estimates operating expenses for affordability calculations.
Alternative Mortgage Options
In addition to the traditional mortgages mentioned above, there is the option of dealing with lenders that cater to borrowers that may not meet the traditional lending requirements imposed by the Prime lenders and mortgage default insurers. These alternative and private mortgage lenders have less stringent qualification requirements, but you may need a larger down payment, and may come with higher costs and interest rates. Consider speaking with your mortgage broker if you’re exploring this option.
Conclusion
This article is a brief overview of the rental mortgages available in today’s market. Navigating rental property mortgages requires an understanding of qualification criteria, down payment requirements, and rental income treatment. While the process may be complex, investors can take steps to improve their chances of approval and maximize their investment potential in the Canadian real estate market.
At TheBroker.ca Ltd, we understand what needs to be done to secure a rental mortgage. We can help identify lenders that best match your credit profile. Talk to us. We can offer you helpful advice on getting a mortgage, understanding current mortgage rates, and guide you through the process that will help you make informed decisions that align with your financial goals.
About Us
At TheBroker.ca Ltd, we are constantly looking for ways to provide helpful advice related to mortgages, current mortgage rates, and more. If you have any questions or need further assistance, we offer a complimentary no-obligation consultation. Feel free to reach out to us at (519) 252-9665 during our regular business hours. Alternatively, you can fill out our contact form, and your message will be promptly emailed to us. We value your time and inquiries, and we make it our priority to respond to all messages within one business day. When reaching out, please provide us with your contact details, a brief overview of your mortgage needs, and the most convenient times for you to have a consultation. We look forward to assisting you with your mortgage.
This article was brought to you by TheBroker.ca Ltd., a mortgage brokerage that is licensed with the Financial Services Regulatory Agency of Ontario (FSRA), which regulates businesses in the financial sector. The Principal Broker Sash Trajkovski has over 20 years of real estate and mortgage experience in the Ontario marketplace. You can verify our licenses by visiting the following links from FSRA’s website: our corporate license and Principal Broker license. Our mortgages services are available to all residents of Ontario. If you’re in Ontario and looking for more personalized advice and information, consider booking your Complimentary Consultation today, and let us help you understand the details that will guide you on your path to a suitable mortgage solution.
Disclaimer: Please note that this information is current as of the date of publication and is intended to be general in nature. It is not intended to provide legal, tax, financial, or other professional advice and should not be relied upon as such. Always consult with a professional for advice tailored to your individual circumstances.
