So, you want to get a mortgage for a rental property?
Well, you’ve come to the right place. Mortgage is in our name.
While the process for getting a mortgage for your rental property is generally the same—getting a pre-approval, having good income and credit, etc.—the type of mortgage you’ll get will be different.
The Type of Rental Property Matters
We have to make this very clear: if you are planning to rent any portion of your home (i.e. legal suite or otherwise), you have to disclose this at the beginning of your mortgage application.
We hate to say it, but we’ve come across a few scenarios where people haven’t disclosed this information and it can lead to a lot of complications. Not to mention, it’s technically fraud…so, don’t do that.
When you start the conversation with your mortgage broker about a rental property, they’ll want to know the type of property you’re looking at.
Single-Family Homes: Standalone houses designed for a single family. They typically have a yard or outdoor space and are rented out to tenants on an individual basis.
Apartment Buildings: Multi-unit residential buildings with several individual apartments or units. They are typically owned and managed by a single entity or property management company.
Condo: Individually owned units within a larger building or complex. Owners of condo units can choose to rent them out to tenants.
Duplexes and Triplexes: Properties divided into two or three separate units, each with its own entrance. Each unit is typically rented out separately.
Basement Suites: Many single-family homes in Canada have basements that have been converted into separate, self-contained rental units. These basement suites often have their own entrances, kitchens, and bathrooms.
Vacation Rentals: Cottages or vacation homes are rented out on a short-term basis for holiday or recreational purposes.
This is only a short list of the potential properties you can purchase. There are commercial properties, mobile homes, shared accommodations (i.e. student rentals)...the opportunities to grow your real estate portfolio are near endless.
Depending on the type of property and location you’re looking to buy in, all will impact the type of mortgage you can get, your downpayment, amortization, and interest rate.
Common Question: Difference Between An Illegal and Legal Basement Suite
This is a question that we receive a lot.
The main difference between an illegal and legal basement suite is that any rental unit that was built without the proper permits or built in an area where your city doesn’t allow secondary suites is illegal.
We could write a whole other post about legal vs. illegal rental suites and their impact to homeowners. However, the main message here is that if you’re planning to purchase a home that already has a rental suite in it, you’re much more likely to obtain financing if it’s legal.
Many homes have suites pre-built but may no longer be up to code. These would be deemed illegal and can impact not only your mortgage application, but your insurance as well.
The Mortgage Basics for Rental Properties
We’re not going to go through every single type of mortgage for rental properties…that would be beyond boring. Instead, we’ll go through a few of the most common things to know about getting a mortgage for a rental property.
If You’re Planning to Live in the Property
If you are also planning to live in the property, such as renting a legal basement suite, your downpayment can be as little as 5%. If you’re planning to purchase a 4-plex, this will go up to as little as 10%.
Generally, rental properties are split into Canadian Mortgage and Housing Corporation (CMHC) Insured Properties and Residential Investment Properties.
Note: If there are more than five units on the property, you would have to apply for a commercial mortgage.
CMHC Insured Properties
Are owner-occupied,
Require between 5-10% downpayment,
Require mortgage default insurance,
Have max 25-year amortization,
Generally have lower interest rates for rental properties
Residential Investment Properties
Non-owner occupied,
Minimum 20% downpayment,
Max 35-year amortization,
Generally have higher interest rates for rental properties
Interest Rates for Rental Property Mortgages
We’re going to set the expectation now: interest rates on rental properties are typically going to be a little higher than owner-occupied properties. The rates you see online or T.V. are not going to be the ones you’ll be approved for on rental properties.
CMHC Insured rental properties will have slightly lower interest rates, but these are still dependent on your downpayment and income.
Using Rental Income to Support Your Mortgage Application
In some cases, you can use rental income in your mortgage application. Some lenders can include as much as 80% of the rent you are expected to receive.
What we’ll say here is that the rules for applying rental income to a mortgage approval are complex. That’s why working with a mortgage pro who knows the rules is going to save you so much time and stress.
Getting Mortgages for Multiple Rental Properties
Again, another topic we could write a whole book about. If you want to own multiple properties, there’s a strategy for choosing the right lenders and setting yourself up successfully.
If you’re only planning to own two rental properties or less, getting a rental property mortgage with a lender that has a specific program that only allows two properties makes sense. If you plan on owning more properties, you might have to go to a different lender.
Are these short-term rentals or long-term investments? Are your properties held in your personal name, holding company, or operating company? Do you have an accounting strategy?
We think you get where we’re going here.
There’s a strategy to getting multiple rental mortgages, and you’ll want to talk about this with your broker at the beginning of your application process.
And that’s really the answer for how to get a mortgage for a rental property. Talk with a broker!
They call it sage advice for a reason—because we have the knowledge and experience to help you buy your first (or 10th) rental property. And, we didn’t even mention the opportunity of private lending for getting rental properties.
We’re going to let that dangle there for you…