Investment property mortgages differ significantly from traditional mortgages. With stricter qualification requirements, higher down payments, and unique tax implications, these specialized mortgages demand careful consideration and expert guidance.
What is an investment property mortgage?
An investment property mortgage, also called a rental property mortgage, refers to a loan used to purchase a property that will be rented out to tenants. Lenders view financing an income property as a higher risk than an owner-occupied property.
You need an investment property mortgage whenever you plan to purchase a property you won’t personally occupy. If you plan to live in one part of a multi-unit residential property while renting out the rest, you may still qualify for a standard mortgage with a lower down payment. However, the financing and tax implications differ depending on your occupancy situation.
What types of investment properties can you finance?
From residential rentals to commercial buildings, investment property mortgages span many real estate asset classes. The most common type of investment properties falls into the residential category, including:
- Single-family homes
- Apartments, condominiums
- Duplexes, triplexes, fourplexes
- Townhomes
- Vacation rentals like cabins and cottages
Residential buildings containing 1-6 units still qualify for residential mortgages, typically featuring lower rates and down payments than commercial loans.
Once a rental property exceeds 5-6 units, it often gets classified as commercial real estate, which has very different mortgage qualification standards and down payments exceeding 25%. Examples include:
- Apartment buildings or high-rise towers
- Office spaces
- Retail complexes
- Hotels, motels, B&Bs
- Mobile home parks
- Industrial warehouses
- Self-storage facilities
While residential properties have more financing options, commercial real estate delivers higher returns. There’s also another type of investment property, known as a mixed-use property, which combines residential and commercial elements. Think of an apartment over street-level retail space. The unique hybrid nature means securing financing through commercial loans or layering a commercial loan with a residential mortgage.
Minimum down payment for an investment property
A key criterion that distinguishes an investment property mortgage is the high down payment required. While owner-occupied homes only require 5 to 20% down, the minimum down payment is 20% for any non-owner occupied residential rental property, whether financing through a traditional bank lender or an alternative financing option.
The lone exception applies to owner-occupied multi-unit properties when specific conditions are met:
- For a duplex or triplex where the owner occupies one unit, the minimum down payment is only 5% if the property is worth $500,000 or less. If the multi-unit property costs between $500,00 and $1,500,000, the down payment is 5% of the first $500,000 plus 10% of the remainder.
- For an owner-occupied property with 3-4 units, the minimum down payment is 10%.
- And if the property value exceeds $1,500,000, a 20% down payment is mandatory even when living on-site.
In short, investment properties with five units or fewer are not eligible for high-ratio mortgages. The higher 20% down payment demonstrates reduced risk and ensures favourable mortgage rates.
How do you qualify for an investment property mortgage?
While specific requirements vary by lender, key criteria to qualify for rental property financing typically include:
Credit score: Most lenders require a minimum credit score ranging from 650 to 700 for investment property approval. The higher your score, the better mortgage rates you can access.
Income verification: Lenders analyze your personal income, assets, debts and credit history to confirm your ability to make payments if the property ever sits vacant. Expect to provide pay stubs, tax returns, and financial statements.
Rental income documentation: Proof of rental income funds mortgage approval. Provide current signed lease agreements and rent rolls if the property already has tenants. If vacant, an appraiser can assess the market rental rate to substantiate income potential.
Non-rental income requirements: Even with rental income from the subject property, lenders still require you to have enough non-rental personal income to dedicate toward mortgage payments in the event of prolonged vacancies.
Debt service coverage ratio: Some lenders apply a debt service coverage ratio (DSCR) when approving investment property mortgages. The DSCR formula compares your expected monthly rental income to your monthly debts. A larger ratio conveys greater ability to manage loan payments.
Rental offset calculation: Alternatively, other lenders use a “rental offset” formula, whereby 50-70% of anticipated rental income can substitute a portion of non-rental income that gets allocated toward the mortgage payment.
Required documents for an investment mortgage
Typical documents needed to submit an investment property mortgage application include:
- Notice of Assessment: Your most recent CRA Notice of Assessment verifies income for qualifying purposes.
- T776: This CRA-issued Statement of Real Estate Rentals form summarizes rental income, expenses, and tax implications across your entire investment property portfolio.
- Lease agreements: Current signed tenant leases or professional opinion letters validating market rental rates substantiate the income-earning potential of your specific rental property.
- Down payment proof: Show fund sources for your down payment, like bank statements, investment portfolio summaries, gift letter (if borrowed from family), or bridge financing terms.
- Net worth documentation: Some lenders enforce minimum net worth thresholds for rental property investors, such as $100,000. Be prepared to demonstrate that your assets exceed any predefined net worth requirements.
Expect lenders to request additional documents depending on the nature of your specific application. Connect with an experienced mortgage broker to ensure you submit a fully compliant application package.
What are the tax benefits of investment property mortgages?
One major incentive for financing investment properties stems from beneficial tax treatment, including:
Deductible expenses
Deduct any expenses associated with renting out your property against rental income for tax purposes, including:
- Mortgage interest
- Property tax
- Property insurance
- Maintenance/capital upgrades
- Advertising
- Property management fees
- Legal fees
- Utilities (if included in rent)
Claiming loss
Unlike stocks, where you can only write off $3,000 in capital losses per year, real estate investors can deduct rental losses in full by applying negative cash flow against other personal income, like employment earnings.
Tax-free capital gains
When you eventually sell your property down the road, any profits are tax-exempt if the property qualified as your principal residence for any number of years while renting it out.
What are the risks of investment property mortgages?
While rental properties provide many financial benefits, assuming liability for mortgage payments on tenant-occupied spaces poses risks, such as:
- Vacancy: Market demand fluctuates. Without tenants, most landlords need sufficient cash reserves or other income streams to cover mortgage obligations and prevent foreclosure.
- Rent withholding: Rent strikes or tenant damage disputes put payments in escrow. Extended delays jeopardize the ability to pay lenders.
- Maintenance: Habitability laws require maintaining safe and comfortable premises for the tenant’s well-being. This creates unpredictable repair expenses that add up.
- Property damage: Irreparable damage or negligent destruction of features may decrease a property’s appraised value below your outstanding mortgage balance, hampering resale value.
- Market cycles: While real estate values generally appreciate over decades, periodic dips reduce equity until markets correct. Economic declines also raise vacancy rates.
- Interest fluctuations: If financing with variable-rate loans, rising interest rates increase costs. This tightens profit margins for landlords.
With proper planning and risk mitigation practices, prudent real estate investing still builds long-term wealth. But anticipating challenges allows savvy investors to navigate turbulence.
Wonder if an investment mortgage is the right choice for you? Explore more alternative mortgage solutions at:
Which Canadian lenders offer investment property mortgages?
Not all lenders participate in the investment property market, and those that do often have specific niches and requirements.
Major banks
Major Canadian banks, such as RBC, TD, National Bank, Scotiabank, etc, provide competitive interest rates to qualified borrowers. However, approval is contingent on good credit, stable income sources, and documented rental income. Expect to put 20-35% down to access ideal rates.
Alternative lenders
Some of the alternative lenders that offer investment mortgages in Canada are:
- First National
- MCAP
- Home Trust
- Equitable Bank
- CMLS Financial
- Merix Financial
- Marathon Mortgage
- Radius Financial
Alternative lenders offer short-term, high-interest financing to individuals who are unable to secure traditional bank approval. The fast approval process makes this a valuable option when bank financing falls through or when you need to quickly capitalize on a time-sensitive real estate opportunity. This serves as an effective bridge solution while seeking better rates. Private money can also facilitate house flipping projects.
Credit unions
Credit unions offer an alternative option, particularly for local investors with community ties. While their rates may not always compete with major banks, credit unions often provide more personalized service and flexibility for unique situations. Some credit unions specialize in specific property types or geographic areas, developing deep expertise that benefits investors. Some of the credit unions offering investment mortgages are:
- Meridian Credit Union
- Vancity
- Coast Capital Savings
- Servus Credit Union
With intricate qualification criteria, working with an investment property mortgage broker simplifies securing financing:
- Benefit from choice: Brokers have access to products from over 50+ Canadian lenders. Few individuals can tap this same breadth of options by direct application.
- Expert guidance: Brokers understand niche loan programs and quickly match you with lenders best suiting your particular financial situation and property type.
- Streamline applications: Brokers manage the full mortgage application end-to-end, including pre-approvals. Their expertise ensures a smooth process.
- Save time: A broker serves as a liaison on your behalf, coordinating with lenders and negotiating favourable terms. This frees up time to focus on your overall investment strategy.
Should you convert your current home to a rental property?
Sometimes it makes sense to move into a new primary residence while converting your existing home into an investment property, generating rental income. However, doing so changes mortgage terms and tax implications.
If you currently enjoy a low mortgage rate with plenty of remaining amortization, keeping that loan as-is while pocketing extra monthly cash flow may suit your strategy. But expect your lender to adjust qualifying criteria once you vacate the property, possibly demanding a 20% minimum equity stake going forward.
Alternatively, refinancing into a formal investment loan unlocks fresh equity for redeploying as a down payment on additional properties. Consult experienced tax and legal advisors beforehand to understand how tenant occupancy impacts capital gains exemptions upon eventually selling.
FAQs about investment mortgages
Can you get a 30-year amortization on an investment property?
Yes. Many lenders do offer amortization periods up to 30 years on rental property mortgages. The longer repayment timeline helps investors benefit from lower monthly carrying costs in order to sustain positive cash flow. However, longer terms mean greater interest paid over the full duration until the principal gets repaid in full. Ideal candidates for 30-year amortization periods typically make down payments exceeding 25% while maintaining top-tier credit scores and healthy debt ratios. Lower credit borrowers often get capped at 25-year terms. Discuss options with your broker.
Can I own multiple investment properties?
Yes, there's no legal limit to the number of investment properties you can own in Canada. However, qualifying becomes progressively more challenging with each additional property as lenders assess cumulative debt obligations.
Is 20% down payment mandatory for all investment properties?
Yes, for non-owner-occupied investment properties in Canada, a 20% minimum down payment is mandatory regardless of the purchase price. This requirement exists because investment properties aren't eligible for mortgage default insurance. However, if you plan to live in one unit of a multi-unit property, you may qualify for lower down payment options starting at 5% for properties under $500,000.
The bottom line: Get your best investment mortgage
Investment property mortgages typically carry slightly higher interest rates than owner-occupied residential mortgages, due to the inherent risk associated with renting out properties to tenants. However, strong personal finances, wise property selections, and larger down payments can help secure more favourable rates. Maintaining a top-tier credit score in the mid-700s or above gives you access to the best rates across any lender’s products catering to real estate investors. Keep credit card balances low and make all payments on time.
Also, compare fixed or variable rate options carefully relative to your risk tolerance, intended rental period, and future plans for the property. Discuss amortization impacts with your broker as well, since longer durations distribute payments over more years, effectively lowering monthly costs but increasing total interest paid over the full repayment period.
Speak with an experienced mortgage broker today to structure competitive financing tailored to your investment goals.