Investment Mortgage Financing
Many Canadians use investments in real estate to diversify their portfolio, and many of them use mortgages to provide the initial financing for the project. There are some differences between securing a mortgage for an investment property as opposed to your primary residence. Two of the factors that will influence your mortgage are your plans to occupy (or not to occupy) one of the units on the property and the number of rental units that are in the building.
If you are starting to look for some investment properties, take a look at the number of units that the building you want to buy has in it. The majority of properties that have four units are fewer have residential zoning. This makes securing a mortgage easier, as residential zoning puts only a little bit more difficulty into the qualification process than what you would encounter when getting a mortgage for your primary residence. However, buildings that have at least five units generally have commercial zoning, which means that you would have to secure a commercial mortgage to purchase it. The qualification requirements are significantly more difficult for a commercial mortgage, and you face interest rates that are a lot higher as well.
If you are looking at purchasing a property with multiple units, it is also important to decide whether or not you plan to live in one of the units. If you don’t plan to live there, you’ll have a required 20 percent down payment. If you plan to live there, it is consider an owner-occupied property, so you can get away with putting down as little as 5 percent if the property has one or two units, and as little as 10 percent if there are three or four units. Putting less down will make your mortgage a high-ratio loan, meaning that you will have to pay mortgage insurance in addition to interest and principal, but you can still make your investment and start bringing in profits.
Before you start signing paperwork, though, ask the lender about their interest rates. Smaller lenders may add a premium to the rate, even if it’s a property you plan to occupy as well, once they find out it’s an investment property. The larger lenders should give you a rate that is the same (or close to the same) as what you would get for a principal residence after you qualify. There’s nothing wrong with shopping around, and even a slight difference in interest rate can save you a lot of money over time.