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Buying an Investment Property

Build equity and grow your income the right way

Purchasing an investment property may be part of your financial plan to build equity as well as income to support a lifestyle plan you may wish to enjoy. For many investors, this strategy has proven to be a very effective means to achieve these. But unlike the mortgage you may have taken on your principal residence, financing an investment property is a little more complex, especially nowadays with more stringent criteria on income and down payment.

First of all, buildings with 1-4 units are zoned residential, and they can be financed under the residential program. A building with 5 units or more falls under the commercial zoning, and require a commercial mortgage.


Investment Properties With 1-4 Units: Residential

When the qualifying criteria is met (buyer’s as well as property’s), then they 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, and this difference is dictated by how the property will be used – will it be fully rented, or will one unit be owner-occupied and the others rented out. Below, please find a chart as that outlines this:

Number of Units Owner-Occupied? Down
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

Where one of the 4 units is owner occupied, only 50% of the rental income is used towards qualification and is added to your gross income in the debt service ratios. When all the units are rented out, most lenders will treat the qualification in the same way above, or some 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 (Total Debt Servicing Ratio).

Multi-Unit Properties with 5+ Units: Commercial

For a conventional mortgage, the maximum financing available is 75%. There are usually minimum loan amounts with many lenders, and they will lend in major and secondary urban centers in Canada. All mortgage terms available and interest rates are higher than the above program. Maximum amortization is 30 years. Qualification is based on a minimum Debt Coverage Ratio of 1.20, and an Appraisal, and Phase 1 Environmental and/or Building Conditions Report are required. Personal Guarantees are required if property registered under a holding company, and there are lender’s fees up to 1%, plus for the above appraisal and 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 allowed to be added to the mortgage. All mortgage terms available, and interest rates are often much better than the best residential rates. Quite often, the lower interest rates offered 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, and for properties with 7+ units a Phase 1 Environment report is required too. CMHC charges $150/unit for the application fee (up to 100 units), and the lender charges up to 1% lender’s fee.

For any questions or specifics about the above programs or property you have in mind to purchase (or refinance), please contact one of our mortgage professionals.

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