Purchasing an investment property for many Canadians has been very profitable. Financing an investment property nowadays is a little more complex with more stringent criteria on income and down payment.
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The Main Difference
Buildings with 1-4 units are zoned residential, and they can be financed under the residential program. Buildings with 5+ units falls under the commercial zoning, and require a commercial mortgage.
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Investment Properties With 1-4 Units: Residential
When the qualifying criteria is met, you are eligible for the very best mortgage rates under the residential program. The major difference is how much down payment a buyer is required to put. This difference is dictated by how the property will be used. For example, will it be fully rented, or will one unit be owner-occupied and the others rented out. Check out the chart below for more info:
| Number of Units | Owner-Occupied? | Down Payment |
Insurance Premium | Maximum Amortization |
|---|---|---|---|---|
| 1-2 | Yes | 5% | 4.00% | 25 years |
| 1-2 | No | 20% | Nil | 30 years |
| 3-4 | Yes | 10% | 3.10% | 25 years |
| 3-4 | No | 20% | Nil | 30 years |
If one of the 4 units is owner occupied, only 50% of the rental income is added to your gross income in the TDSR (Total Debt Servicing Ratio). When all units are rented out, some lenders will do a rental offset by subtracting 50% of the rental income from the total of mortgage payment, property tax component, plus other debts in the TDSR calculation.
Multi-Unit Properties with 5+ Units: Commercial
The maximum financing available for a conventional mortgage is 75%. Many lenders only lend in major or secondary urban centers in Canada and there are usually minimum loan amounts. All mortgage terms and interest rates are higher than the 1-4 units program. Maximum amortization is 30 years. Qualification is based on a minimum Debt Coverage Ratio of 1.20, an Appraisal, and Phase 1 Environmental and/or Building Conditions Report. Personal Guarantees are required if property registered under a holding company. There are lender’s fees up to 1%, a fee for the appraisal, report(s), plus legal fees and disbursements.
If CMHC Insured, maximum financing available is 85%. Insurance premiums range from 1.75% – 4.50% (depending on down payment) and are allowed to be added to the mortgage. Mortgage terms and interest rates are often much better than the best residential rates. Usually, the lower interest rates will offset the cost of CMHC insurance premiums. Amortizations available between 25-35 years. Minimum Debt Coverage Ratio required is from 1.10 for 5-6 units, and 1.30 for 7+ units. For 5-6 units, an appraisal is required. For properties with 7+ units a Phase 1 Environment report is required as well. CMHC charges $150/unit for the application fee (up to 100 units), and there is up to 1% lender’s fee.