Higher Mortgage Rates for Rentals

Interest Rates Rise Header

Buying a rental property may not be as good an investment as you think.  When calculating the benefits of owning a rental property many Canadians will assume that the mortgage financing is the same as if you were buying a residence.  This is not the case.  Mortgages on rentals require bigger downpayments, higher incomes and they often come with a higher mortgage rate.

It wasn’t that long ago that you could buy a rental property with as little as 10% downpayment.  Not as good as the meager 5% required for buying a residence, but much less than the current requirement of a 20% cash downpayment.  This is one of the changes implemented by the department of finance to cool the heated housing market.

When qualifying for a mortgage on a rental property you’ll need a higher income than when buying a residence, even after you take into account the rental income.  No lender will use 100% of the rent you’ll be receiving and just consider it a break-even scenario.  Cautious lenders will take away increments for vacancy, maintenance and miscellaneous expenses.  An aggressive lender will offset the new mortgage payments with only 80% of the rental income.  This will rarely result in a positive cash flow, unless you make a substantially larger downpayment.

You can count on a higher mortgage rate as well.  Even with a great credit score and high income, your mortgage lender will likely charge a modest premium on your mortgage rate.  The rationale is that in the event of a financial catastrophe you will pay your home mortgage before you pay your rental mortgage – family first after all.  The slightly higher risk level warrants a premium of 0.10% to .25% on your mortgage rate.

Long term investments in rental properties can be financially rewarding.  Just make sure you know the facts.

One Response to Higher Mortgage Rates for Rentals

  1. Hello there, I discovered your blog by way of Google even as looking for a related matter, your website came up, it seems to be good. I’ve added to my favourites|added to my bookmarks.

Leave a Reply to Add your link Cancel reply

Your email address will not be published. Required fields are marked *