Thinking about buying a property to rent out? With help from Mortgage Connection, you can find out how to build wealth with real estate. But you may find that getting a mortgage for an investment or vacation property feels a little different. The rules, requirements, and even the rates can vary from the mortgage you have on your own home.
The main reason for these differences is that lenders view an investment property as a higher-risk loan since you do not live there. This simple fact changes how they review your application, from the down payment you need to the way they calculate your ability to pay.
What Makes an Investment Property Mortgage Different?
When you buy a property you do not plan to live in, the mortgage rules shift. Your loan for a rental or investment property has a few key differences compared to the one for your primary home.
It’s an Uninsured/Uninsurable Mortgage
In Canada, mortgage default insurance is not available for most investment properties. This means the lender takes on more risk if you are unable to make your payments, which affects the interest rates and the requirements you need to meet.
Higher Down Payment Requirements
Since the loan is uninsured, you need more of your own money in the deal. Lenders require a larger down payment on an investment property to protect their position and see that you are committed.
Stricter Qualification Rules
Lenders will look very closely at your financial situation. They want to be confident that you can carry the new property and its costs, even if it sits vacant for a few months between tenants.
The Down Payment for Your Investment Property
For many investors, the down payment is the first major hurdle to clear. It helps to know the rules before you even start looking at properties so you can plan accordingly.
Why 20% Is the Minimum
For a non-owner-occupied property, you need to put down at least 20%. This is a firm rule set by federal regulations for all uninsured mortgages.
- 1 to 2 unit properties: Minimum 20% down payment
- 3 to 4 unit properties: Lenders may require 25% or more
Can You Put Less Than 20% Down?
While you cannot get a traditional investment mortgage with less than 20% down, some creative strategies can help. One popular option is to use the equity in your current home through a Home Equity Line of Credit (HELOC) to fund the down payment.
How Lenders Qualify You for a Rental Property
Getting approved for an investment mortgage involves more than just your credit score. Lenders evaluate both you and the property itself to get a full picture of the risk involved.
Your Personal Income & Credit Score
Your own financial health is the foundation of your application. Lenders look for stable income, a low personal debt load, and a strong credit history to see that you are a reliable borrower.
The Property’s Potential Rental Income
Lenders will consider the rent you expect to collect from tenants. They typically use a percentage of this projected income—often between 50% and 80%—and add it to your own income to help you qualify for the loan.
Calculate Your Debt Service Ratios
Lenders use 2 main calculations to see if you can afford the mortgage: Gross Debt Service (GDS) and Total Debt Service (TDS). These ratios simply measure your housing costs and total debts against your income.
Common Rules of Thumb for Property Investors
You can use a few simple calculations to quickly check if a potential property might be a good investment. These rules of thumb help you estimate profitability before you dive deep into the details.
The 1% & 2% Rules Explained
These are quick tests for a property’s cash flow potential. The goal is for the gross monthly rent to be at least 1% to 2% of the property’s purchase price. A $400,000 property, for example, would need to generate at least $4,000 in monthly rent to meet the 1% rule.
What Is Positive Cash Flow?
Positive cash flow should be your main goal as an investor. It is the money left over from the rental income after you pay the mortgage, property taxes, insurance, and all other expenses. Achieving this means understanding your mortgage goes beyond just the interest rate—it’s your monthly profit.
Interest Rates & Loan Terms
The details of your mortgage contract have a big impact on your monthly costs and long-term profitability. Paying attention to these terms is just as important as finding the right property.
Fixed vs Variable Rate Options
You can choose between a fixed rate for predictable payments or a variable rate that fluctuates with the market. Your choice depends on your comfort with risk and your overall financial goals.
Choose the Right Amortization Period
Uninsured mortgages can have an amortization period of up to 30 years. A longer amortization means lower monthly payments—making it easier to achieve positive cash flow—but you will pay more in interest over the life of the loan.
Navigate Investment Property Mortgages with Confidence
Navigating an investment property mortgage can feel complex. Working with experienced mortgage brokers can help you gather all the necessary paperwork and access lender options that may not be available at traditional banks.
Our team at Mortgage Connection is passionate about helping you understand the numbers so you can make a fully informed decision. Reach out to map out a clear financial strategy that aligns with your property investment goals.
