In my previous blog , I discussed a number of reasons why simply looking at mortgage rate is not as important as one may think. This is especially important for the real estate investor interested in building up a portfolio with multiple mortgages and properties. Here are some other things to consider, beyond just looking at the rate.
How does lender account for rental income? Rental income is calculated in various ways (see related blog), and some of these calculation approaches are more superior than others. Depending on your existing debt ratios and income, and the rental income you are submitting for the subject property, you may find yourself ineligible with some lenders. On the flip side, you may want to reserve these tougher lenders for your first couple of properties, before your rental portfolio gets larger and these shortcomings of the rental calculations are magnified by your larger portfolio.
How does lender account for self employed or corporations? This may be a limiting factor for some, because some lenders are very specific about these types of applicants. They may count your income very conservatively (yielding you a lower mortgage amount that you qualify for), and they may choose to add a premium to your rate. Some lenders will not lend to corporations, and if they do, most likely they will ask for personal guarantee. Many times, when you see an advertised special, this group is not eligible.
What level of documentation does lender require? Some lenders are more thorough than others. If it is difficult for you to produce certain documents, this will be a concern. If you are submitting a live deal in a rush, you may have to eliminate lenders who ask for a lot of documentation (being prepared can reduce this situation, submit your document to you mortgage broker ahead of time). Depending on the deal, the lender may as for an appraisal, which costs money and slows down the process. Some lenders use an automatic valuation system, quite beneficial for investors and time-sensitive deals, definitely worth a few small points in the interest rate.
Is the mortgage portable? It may be important to you to know that you can port your mortgage to a new property (subject to re-approval), in case you decide to sell your subject property. Just an added benefit to the flexibility of your portfolio, in case your property is underperforming and you want to clean house sooner than expected. Or, for owner occupied residence, you decide to move before your mortgage term is up. Porting a mortgage avoids the penalty fees, you can add more to the mortgage and blend it with the current interest rates.
Will the lender cross-solicit with other products such as mutual funds, RRSPs, loans and bank accounts? A mortgage loan could open the floodgates for other products the lender offers, by agreeing to the mortgage you agree to this additional bothersome activity. Some lenders insist you deal with everything at a bank branch, another way to sell you stuff in person. One benefit from choosing a mono-line lender (means they only deal with and specialize mortgages) is that this solicitation is limited.
How does this fit into your overall plan for multiple property purchases and mortgages? Are you exhausting a lender that may be better with more challenging portfolios sooner rather than reserving them for future deals? It is best to go with the less flexible lenders first, soon enough they won’t want to deal with you, because you have a multiple property portfolio. Don’t be blinded by simply the rate, reserve your favours wisely.
Most importantly, as a sophisticated real estate investor interested in growing your portfolio, it paramount to plan your lender usage order, based on each lender’s policies on rental property mortgages. There is no point in getting the best rate mortgage with a lender that is flexible with large rental portfolios if you are just starting out. You want to save that lender for your more challenging deal in the future. Your mortgage broker (specializing in investment property mortgages) can help you with all this planning.
On a final note, put things into perspective. A 0.05% difference in rate on a $200K mortgage is about $5 per month. “Don’t step over the dollars to get to the dimes”, choosing a marginally cheaper rate may give you less flexibility and cost you more in effort and time in the long run.