Investment Property Mortgages
The short version
A rental property you will not live in requires at least twenty percent down, because default insurance is not available on pure investment properties. If you will occupy one unit of a property with up to four units, the minimum drops substantially and the rent from the other units can help you qualify, which makes owner-occupied multi-unit one of the most efficient ways into property investing. How lenders treat rental income varies more than almost anything else in mortgage lending: some offset the payment with a share of the rent, others add a percentage of it to your income, and the difference decides whether a deal works. Most prime lenders also cap how many financed properties you can hold. Approvals are on approved credit.
What you need down
Twenty percent on a property of one to four units that you will not occupy. That is a floor rather than a target, because mortgage default insurance is not available on a pure rental, so no lender can go below it.
Five units or more stops being a residential mortgage altogether and becomes commercial financing. Different lenders, different underwriting, usually a larger down payment and shorter amortization, and the property is assessed primarily on the income it produces rather than on you.
How lenders count the rent
This is where the same deal succeeds at one lender and fails at another, and it is worth understanding before you make an offer.
- Rental offset. The lender takes a percentage of the rent, often around half to eighty percent, and subtracts it from the mortgage payment. Only the shortfall counts against your debt ratios. This is generally the most favourable method for an investor.
- Rental add-back. The lender adds a percentage of the gross rent to your income and counts the full mortgage payment as a debt. Mathematically harsher, and common at the big banks.
- Net rental from your tax return. For properties you already own, many lenders use the net rental income declared on your T1. If you write off aggressively against the rental, that number will be small or negative, which is the same tension covered on our self-employed page.
For a property you are buying, expect the lender to want a lease if one exists or a market rent appraisal if it does not. Do not assume the rent you hope to charge is the rent the lender will use.
Living in one of the units
If you occupy one unit of a duplex, triplex or fourplex, the property is treated as owner-occupied. The minimum down payment falls a long way, and the rent from the other units can be used to help you qualify.
For a lot of first-time investors this is the most sensible entry point. You get residential pricing, a much smaller cash requirement, and tenants offsetting your own housing cost. The trade is that you live there, with everything that involves.
Where the down payment comes from
Most investors fund the next purchase from equity in what they already own, usually through a refinance or a home equity line of credit on their principal residence. A line of credit is often the better tool, since you only pay interest on what you draw and you can redraw it after a sale.
Whatever the source, the lender still needs a ninety day history of the funds and will want to see the borrowing against your other property in your debt ratios. Equity taken from one property does not vanish from the calculation just because it has moved.
Once you have a few
Prime lenders generally cap the number of financed properties per borrower, often around four or five. The cap exists whether or not the properties perform well, and hitting it surprises investors who have never had a file declined before.
Past that point the market changes shape. Alternative lenders and portfolio lenders assess the properties on their own cash flow rather than squeezing everything through your personal ratios. Pricing is higher, the flexibility is greater, and for a genuine portfolio it is usually the right structure rather than a downgrade. Our alternative lending page explains how those lenders think.
Making the numbers work
A few things investors routinely underestimate.
- Vacancy and turnover. One month empty plus cleaning and repairs between tenants is a real annual cost, not a rare event.
- Land transfer tax. No first-time buyer rebate applies here, and inside the City of Toronto it is charged twice.
- Maintenance. A budget of one to two percent of value a year is closer to reality than the zero most spreadsheets assume.
- Ontario tenancy rules. Rent increase limits and the time it takes to resolve a dispute affect your returns as much as the mortgage does. Worth understanding before you buy, not after.
Run a purchase through our calculators for the carrying cost, then tell us the property and the rent and we will tell you which lenders make it work.
Run the numbers on a rental purchase
Total monthly carrying cost, the minimum down payment, and the cash you need at closing, before you factor in the rent.
Estimates only, not a rate offer or an approval. Approvals are OAC. See every calculator.
Common questions
How much do I need down on a rental property?
Twenty percent if you will not be living in it, on a property of one to four units. There is no default insurance available on a pure rental, so that is a firm floor rather than a guideline. If you will occupy one of the units, the minimum can be considerably lower.
Does the rent count toward qualifying?
Yes, but how much varies enormously between lenders. Some offset the mortgage payment with a portion of the rent. Others add a percentage of the rent to your income. The same property and the same borrower can produce very different approvals depending on which method a lender uses, which is the main reason to shop this rather than accept the first answer.
Can I buy a duplex or triplex and live in one unit?
Yes, and it is one of the better ways into property investing. Owner-occupied properties of up to four units qualify for much lower down payments than pure rentals, and the rent from the other units can help you qualify. Five units or more becomes commercial financing with entirely different rules.
How many properties can I finance?
Most prime lenders have a limit, often somewhere between four and five financed properties per borrower. Past that point you move toward lenders that specialize in portfolios and assess the properties on their own performance rather than on your personal ratios.
Should I buy in a corporation?
It depends on your tax position and it changes the financing. Fewer lenders will finance a corporately held property, they usually want personal guarantees, and pricing is often slightly higher. Speak to your accountant about the tax side and to us about the lending side before you decide, because the two interact.
Can I use equity in my home to buy a rental?
Very commonly, yes. Refinancing your principal residence or taking a home equity line of credit against it is the usual source of a rental down payment. It also keeps the down payment at residential mortgage pricing rather than anything more expensive.