Many people who immigrate to Canada consider purchasing a second or third property for investment after acquiring their first home. For us Chinese, buying property is a traditional financial management concept. However, the conditions for obtaining a mortgage for investment properties are becoming increasingly stringent. So, how can we find a suitable mortgage for our investment properties?
Firstly, most investment properties are rented out, generating rental income. During the mortgage approval process, the amount of rental income that can be counted towards the buyer's income has a direct impact. Some banks are quite strict, only counting 50% of rental income, while other banks and mortgage institutions that mortgage brokers can find have more flexible calculation methods. In cases of increased expenses, rental income can be maximally and reasonably calculated as part of total income, ensuring that the approval ratio does not exceed the limit. Additionally, some banks have strict requirements that this ratio must be below 40%. However, other banks and mortgage institutions that mortgage brokers can find may allow this limit to be raised to 44% or higher. Underestimating the difference of a few percentage points can mean tens of thousands more in mortgage capacity for someone with several properties. Sometimes, this can determine whether there is enough mortgage to purchase the desired property.
We have also noticed that the documentation requirements for applying for a mortgage have become stricter. For example, some banks require tax documents from the previous 2 to 3 years to prove that the rental income has indeed been received. Other banks and mortgage institutions that mortgage brokers can find do not have such stringent requirements.
Secondly, the down payment requirements are getting higher. Since April 2010, the government has mandated that a minimum down payment of 20% is required for the purchase of non-owner-occupied properties. Additionally, the down payment must come from the buyer's own funds and cannot be borrowed or refunded from the property purchase.
Moreover, many lending institutions have set limits on the maximum number of loans they can provide to a single buyer. Even if the buyer does not have other mortgages or properties with the lending institution, they will not approve loans for more than the specified number of properties. For example, if Bank A allows a maximum of 4 loans, Mr. Wang already owns 4 properties, even if they are all mortgaged with Bank B or have been fully paid off. Alternatively, if Mr. Wang has 2 properties and his wife has 2 properties, when he applies for a 5th property, Bank A will not provide a loan. Additionally, new immigrants, due to having little or no local income and credit history in Canada, may find that many lending institutions offer special policies for new immigrants to obtain mortgages. Generally, it is stipulated that they can only have one owner-occupied property and one investment property. The down payment must also be at least 35%.
At the same time, the requirements for the properties are strict: if significant modifications are made to the property to increase rental income, it may also lead to difficulties in obtaining a mortgage. For instance, if each floor has a kitchen, and the living room and dining room are converted into bedrooms, creating many small rooms, this may raise issues during mortgage approval due to potential safety concerns for the property and tenants. During mortgage approval, property assessments are often required, and lending institutions can easily identify issues related to property modifications.
Finally, it is worth mentioning that for investment property mortgages, the interest rate may not always be the most critical factor. This is because the interest expenses on rental property mortgages can be counted as part of expenses, offsetting some rental income and reducing tax liabilities. Therefore, unlike owner-occupied properties, there is less sensitivity to interest rates. Furthermore, banks with generally lower interest rates may have stricter approval conditions and less flexible contract terms, which may not meet the various needs of buyers. For example, they may require a particularly strong credit history and a significant amount of net assets in the account beyond the down payment. Additionally, if a 30-year repayment term is available, compared to some banks offering 25 years, the monthly repayment amount can be significantly lower, which is often preferred by many investment property buyers who require more cash flow.