Over the last couple of years in Canada, a lot has happened on the investment property mortgage landscape. The most significant one being back in 2010 when Canada finance minister announced minimum downpayment requirements (20%) for investment property mortgages. It shined a spotlight on investors, painting them with a broad brush (unfairly, in my opinion!) as ‘speculative’ and ‘irresponsible’ (thanks to the people who lined up around the corner for million dollar condos), and implied that people needed regulations to control their impulse for buying property. Ever since then, lenders have been very careful with investment property mortgages, assume they are higher risk than owner -occupied (the overwhelming majority of mortgages) and have been tweaking their policies ever since. The policies change often and my general advice to real estate investor is don’t try to understand all the nuances of mortgage underwriting policies, instead ask your mortgage broker how it applies to your situation, if at all. There is no point to freak out about a newspaper headline if not applicable to you. Remember, negative and panic headlines sell, please don’t misinterpret and generalize.
Investors applying for investment property mortgages, usually encounter the following roadblocks at some point of their mortgage application journey. This doesn’t mean that you should throw your arms up in the air and give up, it just means that a mortgage planning strategy is paramount if you want to maximize your ‘mortgage-ability’ and get favourable rates, terms and conditions (specifically, play in the ‘A’ lender space as long as possible).
In no particular order, the following is the first of my series of the 16 most common roadblocks for investment property mortgages. The list is based on current lenders’ policies (in general, ‘A lenders’), and, of course, like all policies, they are always subject to change. Hopefully we will see in the future some changes in the policies in favour of the real estate investor. This list is more applicable to individuals who don’t have hundreds of properties and who are applying for residential mortgages (5plex or less).
1. You run out of your own money to invest. You have tapped out your savings and your secured line of credit (downpayment is not allowed from an unsecured line of credit for rental property). Remember, the minimum allowed downpayment for an investment property mortgage is 20% (there is possibility for secondary financing, but that comes with its own rules and restrictions). That is when you have to start looking at joint venture money partners.
2. You work with a mortgage professional or bank employee inexperienced with investment property mortgages. You get frustrated with them trying to teach them your system and explain to them what your goals are. You are really not sure they came up with the best plan for you, for your future multiple property purchases. With poor planning, they may be inadvertently accelerating you to your mortgage roadblock. Work with a pro that can help you with your big picture and educate you.
3. Your regular income (not from rental property) is too low and/or your household debts are too high, making your debt ratios too high. Sometimes you really have to be realistic, why would a lender loan you more money if you can’t carry your existing debt? Sometimes the remedy is a refinance of your primary residence, giving your some relief of your monthly payment obligations. Or you can add a partner/spouse applicant with income.
4. Some lenders flat out do not lend on investment properties – only owner-occupied or second homes. Investment properties are perceived to be higher risk and some lenders avoid that, others have pulled out indefinitely from investment property mortgages because based on their risk tolerance, they have too many investment property mortgages on their books. Reminder, do not commit mortgage fraud and lie about living in a property.
Stay tuned for part 2 of the list, in my next blog…..
A mortgage broker specializing in investment mortgage is familiar with these (ever-changing) policies and can help you navigate through these roadblocks with proper mortgage planning. Trying to figure all this out yourself can be overwhelming, instead use the time and energy to work on being the superstar real estate investor, finding and evaluating properties and attracting joint venture partners.