How the financing game has changed.
Decoding the mortgage market
more people are looking at investing in Real Estate as a retirement plan. If
you are looking at entering or expanding your real estate investments this article
helps clarify and prepare you. Your real estate agent can help you determine
what areas and types of investment properties will be right for you, using
affordability, maintenance requirements, degree of management involvement as
some of the criteria. If you’re not already working with a real estate agent, The
Bagogloo Team would be pleased to help you determine if investing in property
is right for you, and where best to put your real estate investment dollars.
tipsy housing market and the credit crisis still fresh in our memory,
regulators and lenders are putting higher-risk borrowers under a microscope.
That includes real estate investors.
result, it’s now trickier to qualify for a rental property mortgage –
especially compared to the days before April 19, 2010. (That’s when federal
legislation put an end to insured rental mortgages with less than 20 per cent
So if you
are considering a small rental property and need a mortgage soon, here are some
things to remember.
need an ample down payment
buy a rental home that you won’t live in, almost every lender in Canada will
want at least 20 per cent down. That’s $72,000 on the average $360,000
you’re purchasing a condo or buying in a “higher-risk” city (like Vancouver),
many lenders will want an additional 5 per cent.
the right lender matters more than ever
want to be approved, your “total debt ratio” must fall within lender limits. At
the risk of oversimplifying, your “total debt ratio” is generally your total
monthly expenses divided by total monthly income from all sources, including
sounds simple, but it’s not. A borrower’s ability to qualify often depends on
how much of her rental income the lender recognizes.
think that if a tenant pays you $1,000 a month, you could add that $1,000 to
your income when qualifying for a mortgage. But in many cases, lenders will
credit you with only 50 per cent of the rental income you receive, making it
harder for you to qualify.
there are four ways that lenders calculate your debt ratios, which are beyond
the scope of this column. Suffice it to say, any competent mortgage adviser can
point out lenders with borrower-friendly methods.
there’s one last thing to keep in mind about debt ratios. Different lenders
have different limits. Some lenders let you have a 42 per cent total debt
ratio. Most others permit just 40 per cent. That extra 2 per cent can make a
big difference , especially for folks with mortgages on multiple properties.
here is that the lender you pick can have a major impact on your approval
chances. If your qualifications aren’t perfect, you’ll need a lender that is
open to some common sense underwriting exceptions, and those are getting harder
rental properties = headaches
lenders prohibit you from owning and/or financing an unlimited number of rental
they don’t explicitly forbid it, the inability to count all your rental income
in debt ratio calculations can make approvals challenging, and sometimes
impossible. In fact, it often forces people with big rental portfolios to renew
mortgages with their existing lender at unfavourable rates and terms.
So if you
plan to finance a small rental empire, find a broker that has several clients
with 10 or more rental properties. They’ll need that experience to help you
know which lenders to use, and in what order.
to remember is that lenders with the best rates often have the tightest rules.
If you want the best terms, you’ll want to use the more restrictive lenders
early in your empire building and save the flexible ones for last. That ensures
you don’t run out of competitive lenders when your portfolio gets big.
years ago, it was easier to use an appraiser’s estimate of a property’s rental
income in lieu of a signed lease. Today, more and more lenders want to see a
signed written lease or other proof of rental income.
helps to have two years’ tax returns available. That’s because using tax
returns to show your net gain or loss on a property can make it easier to
qualify, as opposed to using other standard debt service calculations.
is often secondary
mortgages are higher risk so many lenders now charge rate premiums.
you can still find lenders that extend their best rates on investment
financing. The question is, do they offer the other features you need?
keeping with supply and demand, the most flexible mortgages usually cost more.
That’s especially true for investment property financing. Be prepared to pay a
little extra if you need a lender that satisfies more than a few of these
- has highly flexible rental
- allows you to carry a
greater debt ratio
- lets you put a property in a
company name for liability protection
- lets you finance more than
four or five properties
- doesn’t impose a minimum net
- allows 30– to 35-year
amortizations to maximize your cash flow
- lets you prove rental income
with “market rent” appraisals
- allows a gifted or borrowed
- allows you to add a second
- will lend on large mortgages
- has a low minimum credit
score (e.g. 600 versus 650)
- allows rental income from
suites that don’t conform with current municipal bylaws
- provides cash back
(sometimes handy for improvements and closing costs)
- allows you to add a vendor
take-back mortgage (this is where part of your purchase is financed by the
- offers a line of credit with
your rental mortgage
- pays for your switching fees
(this is far less common with rental mortgages than it is for regular
your broker carefully
want the best rental rate and most flexibility, an experienced no-fee broker is
the way to go.
financing is truly a specialization and probably only one in 10 mortgage
professionals are actually proficient at it.
Robertson, founder of the lender comparison firm Mortgage Mentor, says one way
to screen brokers is to ask how many properties they’ve financed in the last
year. If the number is less than 10 or 15, find a more experienced broker.
Robertson adds, “Deal with a broker that uses a lot of lenders. Each lender has
its own niche and no two lenders in Canada have the same rental policy.”
McLister Special to The Globe and Mail
Monday, Dec. 10 2012, 5:00 AM EST
McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at
VERICOintelliMortgage. You can also follow him on twitter at @CdnMortgageNews.
If you have questions, or want advice on Buying or Selling a home,
get in touch with The Bagogloo Team of RE/MAX nova by
email at email@example.com or call