Investment property Mortgages:
Do you have questions about buying rental properties and being approved for investment property mortgages in Canada? We are here to help by providing you with the information and expertise that you require to ensure you make the best investment decision possible.
Obtaining an investment and rental property mortgage in Canada can be a very positive, clear, and excellent experience if you understand the underlying fundamentals that banks and trust companies are now using for your approval along with having someone with a strong investment and rental property mortgage background to help guide you. Rental property mortgages in Canada require between 20% and 30% down payment depending upon the lender, with some lenders allowing a portion of your down payment to be gifted funds from your family. The biggest challenge that has arisen in this unique lending field in the past couple of years is the decrease in the number of lenders who are willing to lend for clients who have multiple investment and rental property mortgages. Lenders have limited their lending through several different strategies ranging from limiting the number of rental properties a client is allowed to own, to adding large liquid net worth requirements the preclude all but the strongest clients from qualifying, to implementing new rental offset calculations that make qualifying for more than two or three rental properties very challenging for almost all clients.
For Canadians who are purchasing their first investment property it tends to be a relatively straightforward process, for these clients we are able to ensure their investment and rental property mortgage is put together quickly, clearly, and with excellent rates and terms. The second group of clients, namely the ones who own multiple rental properties and are sometimes referred to as “sophisticated investors” are the ones who have experienced the largest changes in how lenders view them and underwrite their mortgage approvals. We have included below details about how lenders determine the size along with the number of investment property mortgages you are able to qualify for. We employ all of these methods along with our long standing lender relationships to ensure a great fit for our clients.
Investment and rental property mortgage structuring:
The lending field for our real estate investor clients used to be plentiful with lenders who were willing to use strong rental offsets, debt coverage spreadsheets, and portfolio based underwriting techniques. Unfortunately for the investors who are now obtaining an investment and rental property mortgage these lending options have decreased substantially. However, the remaining lenders who cater to sophisticated investors can be a great fit for you if you are working with someone who has experience and knowledge in their underwriting techniques and options.
There are four methods that lenders use to calculate the income and expenses from your rental properties in order to determine your mortgage approval qualification. As well, some lenders combine the various methods and will for example use the “rental add back method” for the property you are buying and then use the “tax return method” for your current rental portfolio.
Rental add back method – This is the most punitive method that lenders use and unfortunately this is currently the method that most lenders are using. In this calculation lenders will usually use 50% of your gross annual rental income and add it to your personal income and then they will use 100% of your new property liability and add it to your liability column. The problem with this method is that within the debt servicing calculations liabilities count against you much more than income counts for you.
For example if you have a rental property with $1200 rental income and $1000 liabilities, a common sense person would agree that this property covers itself and it should not count against you. However in this example with the rental add back method, you will receive an increase in your annual income of $6000 however your monthly liabilities will also increase by $1000 and have the same negative qualifying effect as if you had a $33 000 balance on your credit card. This can be a significant barrier to you qualifying for your new investment property mortgage.
Rental offset method
This used to be the most prevalent method used by lenders and now is one of the least common. It can be a very favourable calculation for our investor clients, with most offset lenders using an 80% offset.
If we go back to our previous example we would have a $1200 per month rent x 80% = $960 and then subtract our monthly property liabilities from this amount of $1000 to end up with a net minus $40 per month. This negative amount per month has a very minimal impact on your qualification and is the same as having a $1333 balance on your credit card.
Debt coverage ratio method
This is the method that we use with many of our sophisticated investor clients as it tends to be very favourable for clients who own several rental properties. Lenders will often ask for a minimum debt coverage ratio (DCR) of between 1.1% and 1.3%.
The DCR is calculated within a predetermined lender spreadsheet, however a simple way of describing it using our previous example would be to take our rent of $1200 and divide it by our liabilities of $1000. This would give us a DCR of 1.2. With this DCR the lender would consider the property or portfolio as self sustaining and would not count any of it against you within your qualification and approval numbers.
Tax return method
This method is often combined with the Rental add back or Rental offset methods. The lender will often use the tax return for our clients’ current rental portfolio along with one of the other two methods for the property they are purchasing. With this method we review your previous year personal tax T1 general with the statement of real estate rentals or your corporate financial equivalent to determine if your rental properties had a surplus or a loss. If they showed a surplus we often add it to your income and then consider the properties as covering themselves, if you have a loss we add it as a liability and then consider the properties as covering themselves. This can be an excellent method for our clients who have larger portfolios.
The number of properties you own:
The other significant change that has occurred in the past couple of years is lenders limiting the number of rental properties that a client is allowed to own either with the specific lender or as a total within their portfolio. Most major Canadian banks and trust companies have started to limit the numbers of rental properties per client at either four or five. That being said we do have several strong lenders who will consider lending for clients with larger portfolios. If you have received the response that you do no qualify because of either your debt servicing or the number of properties that you own, please contact us and we would be happy to discuss your options with you.
How we can help you:
We want to answer your questions and create custom investment property purchasing options for you. As a part of our service we will outline your mortgage pre-qualification amounts along with your payment options in advance of your purchase. This will allow you to ensure your budgets and cashflow numbers are a great fit and help ensure you achieve your purchasing goals. Further to this, we have years of experience in explaining the process and mortgage nuances when we are working with clients who are purchasing their first investment property and at the same time our experience allows us to provide in depth and custom solutions for those who have large rental portfolios. One of the most important assets you can have in effectively growing your rental portfolio is a mortgage professional who understands how to structure, package, and present your new investment property and current portfolio to the right lender. We would be happy to connect with you and answer any questions that you have, please feel free to contact us via phone, apply online, or with our online contact form.
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