With the many mortgage rule changes implemented over the last few years, financing has evolved resulting in lenders underwriting owner occupied and rental properties differently.
The reason boils down to risk assessment. Lenders take the view that properties that are declared to be primary residence or second home, carry the least amount of risk in a lending scenario versus properties that are rented. Rental properties are viewed to carry more risk for default and/or poor maintenance in the event of financial downturn.
Here are some of the implications of how this impacts lending today:
- Interest rates and minimum downpayment amounts for rental properties are higher than they are for owner occupied or second homes.
- For an owner occupied or second home purchase under $1 million, you can obtain high ratio financing with as little as 5 to 10% down with mortgage insurance from one of Canada’s mortgage insurance companies. Click here for more information on minimum downpayment amounts for high ratio financing.
- For a rental property, the minimum downpayment is 20%, and could possibly be more, depending on the type and value of property.
- Rental property purchases or refinances require a full appraisal with a schedule of economic rents to confirm the rental income potential of the property.
- When you are purchasing your primary residence or a second home, the purchase contract should be written with vacant possession. A purchase contract written to honour existing tenancy agreements could be potentially viewed as a purchase of a rental property, depending on which lender you are working with. If your purchase contract has been written this way and you plan to give notice to the existing tenants, the lender may come back and require the purchase contract be changed to reflect vacant possession. Some lenders are extremely particular about this so if your purchase contract cannot be changed, obtaining an approval through a different lender may be required.
- Second home purchases are qualified without the use of rental income.
- If you are purchasing a home with a suite, the home can still be treated as owner occupied, and the rental income can still be used to help with your qualification.
If you consider the process when you take out insurance for your home, the insurance company will take down all the pertinent information to assess the appropriate amount of risk associated with insuring the property. Details such as the property type, heat, and age of electrical & plumbing, are all important factors that influence the cost of your insurance policy.
Underwriting for a mortgage application is a similar process; the lenders collect information about you (the borrower), and information about the property. The intended use, property location, property details, and how you qualify, are all factors that play a role in determining how much you will be able to apply for, and what the available interest rates will be.
As always, the above information is subject to change!
Please do not hesitate to call or email with any lending questions you may have: firstname.lastname@example.org.