Dear Ross, can I buy an investment property with a small down payment, like say five or ten percent only?

No, you are going to need at least a twenty percent down payment if you want to purchase an investment property. Not many of us have that kind of money sitting in savings accounts though.

If you are already a homeowner, chances are you have enjoyed some pretty healthy growth in the value of your home in the past year or two. You can consider tapping into this home equity and sourcing the rental property down payment there.

Dear Ross, if I buy a house and I plan to rent out the basement to help with my bills, will the mortgage lenders qualify me for a larger mortgage because of the extra rental income?

The reality is most such homes around the GTA do not come with legal, conforming rental units, retrofitted to the Fire Code. As such, their income potential is irrelevant to your mortgage lender. It’s different if you have are buying a legal duplex, triplex or quadplex, so be sure you ask your real estate agent whether or not the property you wish to be confirms to code.

Dear Ross, if we buy a rental property, will my mortgage interest rate be as good as the one we have on our family home?

When it comes to rental properties some lenders factor in so many variables, we need all our fingers and toes to figure out all the possibilities. But to answer your question, no, the mortgage interest rate on a rental property will typically be a touch higher. For example:

  • Some lenders charge a rate premium if the amortization period is greater than 25 years
  • Some lenders charge a rate premium if the loan to value ratio is greater than 60%, others if greater than 65%
  • Some lenders insure such mortgages and may pass on the premium to the client (yes even though the down payment is 20% or more)
  • For some lenders, best rates are available if there are two to four units in the subject property. (for example, a legal duplex, triplex, or quadplex)
  • Sometimes we brokers (or branch personnel) will try to reduce the rate further by “buying down the rate”

Related Article: How to choose a rental (investment) property

Related Article: Top ten reasons to refinance your Toronto mortgage

Tip of the Day

If the bank doesn’t want to speak with you… if alternate lenders are not interested… if all seems hopeless but selling your home isn’t an option… a private mortgage may be your only hope

— Money Matter № 168