Rental Property Mortgage

All You Need to Know

WOWA Simply Know Your Options

Special Rental Property Mortgage Rates

Mortgage Term	Lender	Rate
1-YEAR FIXED	SBI Canada Bank	5.85%
2-YEAR FIXED	6ix Mortgage Group	5.29%
3-YEAR FIXED	SBI Canada Bank	4.30%
4-YEAR FIXED	SBI Canada Bank	4.30%
5-YEAR FIXED	SBI Canada Bank	4.30%
10-YEAR FIXED	Butler Mortgage	6.89%
3-YEAR VARIABLE	SBI Canada Bank	5.00%
5-YEAR VARIABLE	SBI Canada Bank	5.00%

Updated as of November 12, 2024

Understanding mortgages in Canada can be overwhelming. An investment property mortgage has unique features that make them different from mortgages for owner-occupied residential properties. For example, owner-occupied properties can be high-ratio, meaning that downpayment can be as low as 5%-10%. In contrast, a non-owner occupied property requires a minimum of 20% downpayment even with CMHC insurance.

If you're thinking of buying an investment property, this article will simply explain rental property mortgage characteristics, interest rates, income tax claims, and qualification criteria. Continue reading to become an expert in 5-10 minutes.

Investment Property Mortgages

Initially, your mortgage characteristics will depend on the purchase price and number of units your investment property has. To qualify for a down payment of less than 20%, your property must meet the following criteria:

• Less than five residential units
• The purchase price is less than $1 million
• Intend to live in one of the units

For first-time real estate investors, we recommend meeting all criteria. You can still receive a small rental loan (mortgage) if you don't meet these criteria. However, you will need a minimum 20% down payment. This process is known as "house hacking" because the other 1-3 units will contribute to your monthly mortgage payments and ideally leave you with some rental property income. It’s a similar concept to the BRRRR method, where your tenant’s rent payments are used to pay your mortgage.

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When considering CMHC-insured mortgages, buying a property with more than four units requires a commercial mortgage, while properties with less than five units use a residential mortgage. When considering uninsured mortgages, buying a property with more than six units requires a commercial mortgage, while properties with less than seven units use a residential mortgage.

A commercial mortgage has higher interest rates and a stricter qualification process. A commercial mortgage also may have net-worth requirements. For example, a lender might require your net worth to exceed 25% of the loan value.

A commercial mortgage is often more complicated and costly than a residential mortgage. For example, a commercial mortgage requires an environmental site assessment (ESA) and might require a building condition report. The ESA aims to determine whether contaminants are affecting the property. ESA should be performed according to provincial environmental regulations. A building condition report is a more involved and costly version of the building inspection which is also common for residential purchases.

Insured Residential Mortgage

If you don't live in one unit for at least a year, you'll need a 20% down payment. However, if you live in one unit, the purchase price is less than $1 million, and there are less than five units in the property, you're eligible for a minimum 5% to 10% down payment. The lower down payment is due to mortgage default insurance, so you'll need to meet all CMHC mortgage rules. A benefit of mortgage default insurance is that you'll likely receive better mortgage rates in Canada.

You can pay a minimum 5% down payment on the first $500,000 in value of your property. However, any value between $500,000 - $1,000,000 must have a 10% minimum down payment. For example, a $700,000 property would need a down payment of at least $45,000 (500,000*5% + 200,000*10%).

According to CMHC, Canada’s national housing agency, when you intend to reside in a property with 1 to 4 units, its mortgage would be a homeowners loan. A homeowner loan for a 1-2 unit property can have a loan-to-value (LTV) ratio as high as 95%, which means a down payment as low as 5%. A homeowner loan for a 3-4 unit property can have an LTV as high as 90%, which means a down payment as low as 10%. A single-unit property where the purchaser does not intend to reside is not eligible for CMHC mortgage default insurance.

CMHC also offers mortgage default insurance for small rental loans. A small rental loan is a residential mortgage for a property containing 2-4 units where the purchaser intends to rent all the units. Small rental units have a maximum LTV of 80%, which is equivalent to a 20% down payment.

Your mortgage amortization is the number of years it will take to pay off your mortgage fully. Generally, real estate investors prefer more extended amortization periods because it reduces their monthly mortgage payments. As a result, a longer amortization will provide you with better cash flow each month.

Depending on the type of property you purchase, you can qualify for a maximum amortization of 25 or 35 years for residential property. If you have CMHC mortgage default insurance (which is compulsory with a down payment of less than 20%), then you'll have a maximum amortization of 25 years.

If your down payment exceeds 20%, you can extend your amortization. Some Canadian Lenders offer 30-year mortgages and 35-year mortgages. You will not need to live in a unit to do this. However, there is an amortization extension fee, and you will have higher interest rates than a 25-year mortgage. Ideally, your monthly mortgage payments will be smaller, but given the variables, it's helpful to use a mortgage payment calculator to compare.

By Canadian law, you must have mortgage default insurance if you have a high-ratio mortgage meaning a down payment of less than 20%. The insurance protects your mortgage lender if you default on your loan. Homeowner purchase program is the most common mortgage default insurance program. To participate in this program, you must purchase a property with four or fewer units valued below $1 million and live in a unit for a year.

Otherwise, if your down payment is 20% of the property price or more, you will not need mortgage default insurance. Although CMHC insurance may provide you with lower mortgage rates, there are additional minor fees.

You can deduct mortgage interest payments to lower your taxable income in Canada. However, you can only do this with investment properties and not primary residences. You must factor out your proportionate square foot percentage from the deduction if you live in a unit. For example, if you own a 5,000 sq ft. rental property and inhabit a 1,250 sq ft. unit, then you can only deduct 75% ((5000-1250)/5000) of the mortgage interest costs.

Each year, you will receive a T5013 slip from your mortgage lender showing the amount of interest paid. You must fill out Line 8710 with the appropriate amount to claim the mortgage interest payments. Additionally, you may claim the costs directly associated with receiving the mortgage, such as:

• Legal fees
• Mortgage broker fees
• Application & processing fees

With the deduction, you will lower the total amount of tax you need to pay. Some other popular rental expenses you can deduct in Canada include:

• Rental property insurance
• Repairs and maintenance
• Property taxes
• Utilities
• Travel expenses
• And more

It can be easier to qualify for a rental property mortgage in Canada. This is because you can use some of the rental income you are receiving in the future to meet requirements. You will always need the standard required documents to purchase a property in Canada.

However, specific to rental properties, you will also need to establish the amount of rent. This can be done either through existing rental agreements or through an opinion of market rent which can be provided by an appraiser. If current rental agreements are not available, your mortgage broker or mortgage lender would ask for an opinion of market rent when they are ordering a home appraisal for your mortgage.

Your mortgage lender will then use this information to calculate your debt coverage ratios. They will also make sure you meet the minimum credit score requirements.

Best 5-Year Fixed Mortgage Rates in Canada

Select Mortgage Term:

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2-Yr

3-Yr

4-Yr

5-Yr

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Qualification for residential mortgages is often based on gross and total debt service (GDS and TDS) ratios. Both of these ratios have the borrower’s income in their denominator. The numerator in GDS includes housing expenses, mainly mortgage principal repayment, mortgage interest, property taxes and heating costs. The numerator in the TDS ratio includes the numerator in the GDS ratio in addition to any other debt payment obligations.

Rental income can be included in your earnings either as gross rental income or net rental income. In the gross inclusion method, the lender can include as much as 50% of the rent you are expected to receive. In this method, taxes and heat may be excluded from the numerator of debt service ratios.

In the net rental income method, the lender estimates the operating expense of the property.

Net Rent = Gross Rent - Property Operating Expenses.

Net rent is added to the borrower’s income for the purpose of calculating affordability ratios. Gross rental income is often used for smaller properties with a homeowner or small rental mortgage while net rental income method is often used for commercial mortgages.

Although your lender can decline your mortgage application, you can take steps to improve your chances of approval. Investment property mortgages can be similar to conventional mortgage loans. However, if your property doesn't meet CMHC mortgage default insurance regulations, the process gets more complex. Although you can still receive a mortgage without meeting the criteria, you’ll have a higher down payment and interest rate.