Photo: Rob Campbell/Flickr
The following is a guest post by RateHub.ca, a mortgage rate comparison site that helps Canadians find the best mortgage rates in the country. RateHub.ca also features an education centre built to address common questions from both first-time homebuyers and current homeowners.
If you, or someone you know, are still renting while waiting to buy, you’ve undoubtedly seen more and more listings for condos pop up in your vacancy searches. With so many new developments going up across Canada, and average housing prices reaching record levels in some markets, it’s easy to see why more people are jumping into the condo market — especially from an investment standpoint.
Last month, a report released by the Canada Mortgage and Housing Corporation (CMHC) revealed that 461,000 condos were purchased as investment properties in 2011. In 2012, the report found that nearly a quarter of all condos were being rented out in Toronto and Vancouver, where 23 per cent and 26 per cent of investor-owners had listed their condos on MLS. Unfortunately, because these numbers only pull from MLS listings, the data is incomplete. So many more condos are listed on sites like Craigslist that one Toronto development consultant thinks the number is “more like 50 per cent.”
If 50 per cent of the condos in Toronto were purchased as investment properties, that means 50 per cent of all condo mortgage applications could have looked slightly different than the mortgage applications for a condo that would serve as a principal residence. While there are many similarities between obtaining a mortgage for both, there are some key differences to be aware of. If you’re thinking of purchasing an investment condo this year, here’s what you need to know about investment property mortgages.
Your Down Payment
In Canada, if you’re purchasing a principal residence for you and your family to live in, the minimum down payment you must make is five per cent of the purchase price. However, if you’re purchasing an investment property, your minimum down payment is dependent on the number of units and whether or not you plan on living in one. With an investment condo, there’s obviously only one unit — and since you won’t be the one living in it, your minimum down payment is 20 per cent of the purchase price.
The chart below shows how the minimum down payment works for all scenarios, including how it would work if you were to purchase a small building, such as a triplex or fourplex.
Your Mortgage Default Insurance Rates
Since we know you won’t be living in the condo yourself, let’s look at how your down payment will affect your CMHC insurance rates. Yes, even though you’re putting down 20 per cent or more, you still need to purchase mortgage default insurance; this is something you wouldn’t even qualify for, if you put 20 per cent down on a principal residence.
So, let’s say you buy an investment condo for $450,000 and you put down $112,500 (25 per cent). Your mortgage would be calculated as: $450,000 – $112,500 = $337,500. If you chose to amortize your mortgage over 25 years, the chart below tells us your CMHC insurance rate would be 1.25 per cent, so your premium would be calculated as: $337,500 x 1.25 per cent = $4,218.75. The premium is then added to your mortgage ($337,500 + $4,218.75 = $341,718.75) and paid off over the life of your mortgage.
Your Debt Service Ratios
Now, to get this mortgage application approved, your lender will need to run some numbers to make sure you qualify for the loan. With a principal residence mortgage application, lenders will calculate both your gross debt service (GDS) ratio and your total debt service (TDS) ratio; both are used to determine how much you can afford to borrow and repay, based on how much debt you already have and how much it will cost to pay for your monthly housing expenses.
If you know you’re purchasing a condo as an investment property, there are three different calculations your lender may perform to determine how much money you can afford to borrow; they are: rental inclusion, rental offset and the debt service coverage ratio. Each calculation takes into consideration how much rental income you are expecting from the property. For examples of each, you can visit our website.
Your Mortgage Rates
Finally, the good news — at least from our perspective — is that as long as you can put down 20 per cent or more and meet the qualification criteria, you should be able to get the same mortgage rates for your investment property as you would with your principal residence! Well, at least with the big banks. Some small lenders may charge a small premium (like +0.25 per cent), while others don’t offer investment property mortgages at all. If you don’t have the time to shop around yourself, sit down with a mortgage broker who can map out all of your options and do the rate hunting for you.