Investing in Rental or Vacation Property
Vacation Property
With interest rates still near historic lows, many Canadians are taking a close look at the investment and lifestyle benefits of vacatiion property. Most assume that financing such a property is an expensive and complciated undertaking. In fact, whether your preference is a cozy cabin in the mountains for winter sports or the classic summer cottage, you should be able to obtain financing on a vacation home with an interest rate that is fairly competitive with the financing on your principal residence.
First you need to have a clear understanding fo what size mortgage you can realistically expect a lender to approve. For most financial institutions, mortgage approval criteria remain fairly constant for both primary and secondary residences. Lenders are concerned with your gross income, your ability to repay the debt in a timely manner, your other debts (such as credit card balances, personal loans, lines of credit) and your credit worthiness. If you meet these generic requirements you should be able to get a mortgage with a very competitive rate.
If you have a down payment of at least 25 percent of the value of the property, you can apply for a conventional mortgage. When the loan is classified as conventional financing a greater emphasis is placed on the amount of the equity in the property as opposed to the applicant's income.
If a purchaser has less than 25 percent down in relation to the cost of the home, the loan must be insured through either the Canada Mortgage and Housing Corp. (CMHC) or GE Mortgage Insurance Canada. These insured mortgages have qualification guidelines to which the lenders must adhere, making it more difficult for some to be approved. To give an example: self-employed individuals typically offset as much of their earnings as possible to reduce tax liabilities. The resulting low net income can make it virtually impossible for a mortgage to be approved based on traditional debt servicing requirements. In this case, having a full 25 percent down payment can often prompt a lender to approve a mortgage application, whereas an insured mortgage with a lesser down payment might very well be turned down.
With legions of baby boomers entering the market, demand for recreational and retirement property is expected to remain high. A vacation home is more than just a luxury item - it can be a solid real estate investment that appreciates over time. Best of all, you will have a retreat that offers peace and tranquillity not often found in the city. If you dream of a place in the country the good news is just how aggressive lenders will be to get your mortgage business.
Investment/Rental Property
In addition to the traditional rules surrounding investment purchases, which required borrowers to have a minimum of 25 percent down, recent changes have seen the introduction of an innovative new rental program that makes it possible for borrowers to purchase a rental property with as little as 10 percent down. Today's products allow clients the benefit of extended amortizations up to forty years, and even interest only payments. With greater rental offset options and qualification flexibility it is now easier than ever to purchase a rental home. Rental purchases with less than 25 percent down will have a slightly higher insurance premium than owner occupied high ratio mortgages. Be sure to contact your mortgage broker to examine things and find out if you can qualify.