Buying an investment property is a popular option for Canadians looking at different ways to invest their money. However, unlike the mortgage you took out on your principal residence, financing an investment property is a little more complex. The number of units in the building and whether or not you'll be occupying one of the units are the two major components that control what your financing will look like. Let’s take a look at how investment property mortgages work in Canada.
Investment Property Mortgages
When you start shopping around for an investment property, the first thing you need to consider is the number of units your building will have. Most buildings with 1-4 units are zoned residential, so the qualification criteria and financing options from lenders are only slightly more difficult than that of a mortgage similar to what you have on your principal residence. However, buildings with 5 or more units are zoned commercial, so a lender would require that you take out a commercial mortgage on it. With a commercial mortgage, the qualification criteria is even tougher to meet and interest rates are often much higher.
If it's a multi-unit property, the second thing to consider is if you, the owner, will be living in one of the units or not. If you will be occupying one of the units, the property would be considered owner-occupied. If all of the units will be rented out, your property would be considered non-owner occupied. The major difference between the two is how much of a down payment you need to make.
Since April 19th, 2010, Canadians have been required to make at least a 20% down payment on non-owner occupied investment properties. Use the following chart to see the minimum down payment both owner and non-owner occupied investment properties require.
|Units||Owner-Occupied?||Down Payment||Max Loan-to-Value|
As you can see, non-owner occupied investment properties require at least a 20% down payment. However, if you plan on living in one of the units, you can put down as little as 5-10%, depending on the total number of units in your property.
Maximum Amortization Period
If you put down anything less than 20% on an investment property, your maximum amortization period will be 25 years. However, if you put down 20% or more, you may qualify for a 30 or 35-year amortization period. This is one aspect of an investment property mortgage where it does not matter if the property will be owner-occupied or not.
Investment properties with 1-4 units are eligible for very competitive mortgage rates, as the Canadian Mortgage and Housing Corporation (CMHC) has mortgage default insurance to minimize the risk to lenders.
Owner-Occupied Investment Property CMHC Insurance Rates
If your investment property will be owner-occupied, your CMHC insurance premium rates will be as follows:
Non-Owner Occupied Investment Property CMHC Insurance Rates
If your investment property will not be owner-occupied, your CMHC insurance premium rates will be as follows:
*If you put down 20% or more, you may qualify for up to a 35-year amortization period. However, for every 5 years of amortization you add to 25 years, you must pay an additional 0.20% premium.
**Note that you may not need to purchase CMHC insurance, if you put down 20% or more. However, if you barely meet the qualification criteria, a bank will require that you pay these premiums to access their best mortgage rates and terms.