Financial Channel

Hi,

I am thinking of purchasing a house as investment.....
But, Mortgage rep's words to me seems that purchasing as investment is harder to arrange for mortgage???

Is it harder to get a mortgage for investment as house as opposed to move in?

target house price around $530,000

Thanks for your input in advance

Firstly you will need at least 25% downpayment. It is possible to get a mortgage with a lower downpayment but the CMHC fees are extortionate (much higher than a primary residence mortgage).

Secondly, if you plan to rent out the property, the bank will do an assessment of how much rent it can expect to generate. They will then count 50% of this potential rental income as your personal income. Then they will see if you qualify in the same way they would for a regular mortgage - i.e. look at your current debts, living costs etc.

This is from my personal experience getting investment mortagages from RBC - I don't work for a bank

Thanks for your input,
So, it sounds to me that a rental property is easier to get a better mortgage, as you said it will count partial rent into personal income, ie, better for getting a higher mortgage? Or am I misunderstanding something? (sorry I am really not good with mortgage info)

That's true. Basically the bank wants to make sure you have enough income to cover the mortgage payments. The bank won't really know if you actually get a tenant however, so you could always tell them you are planning to rent it when you apply for mortgage to have them include half the projected rental income. However are you planning to buy a property and leave it empty?

Now I get it.....Thanks

I am not planning to leave it empty......of course, preferably to rent out first day after I buy it........

BTW, what other stuff can I consider for benefit when it comes to income tax? I mean, should I pay down less principle and have more interest to incurr during the year, that way, I can claim more expense on interest when I claim income tax for rental property or how does that work?
Is it also better to hire a real estate agent to look after the property and that way I can claim on the expense as well?

You can write off interest expenses as well as property tax, maintenance and other stuff like that.
Some people like to have a huge mortgage so they can write off a huge amount and get a nice tax refund. However I personally don't see the point in this. Sure you get a refund, but you are also throwing away even more money and giving it to the bank. Better to pay down the principal and build up your equity. You do get taxed on the principal payments but 50% of something is better than 100% of nothing.
Probably the best thing to do is work out a couple of "what if" scenarios with different types of mortgages and calculate your situation in a few years. A lot depends on the tax brackets you will fit into and the rent you think you can receive.
As for using an agent to manage the property, they tend to charge a lot for doing pretty much nothing. Unless you really can't be bothered to look after the occasional tenant issue I wouldn't recommend it.

It's harder because you need a larger down payment, and because less institutions are investment-friendly.

If you don't already own a personal resident (and there therefore, have an existing mortgage payment) AND you have the 25% down, then you can obtain a larger mortgage.
It depends on your business plan.

Many people think it's "better" to have a huge mortgage paying 5% interest and use that money to purchase more property that earns 10% return.

I keep my investment mortgages as large as possible, which is 65-75%. It's not because I want larger write offs during tax time, but because I want to preserve the capital for other investments. I would rather invest in two houses with 25% down payments than one house with a 50% down payment.

As your home appreciates, you can also take money out of the house. For example, it's worth $400k today. You paid $100k and your mortgage is $300k. Next year, it's worth $500k. As long as you keep $125k in the home, you can mortgage $375k. If I assess the real estate trend will remain strong and the bank continues lending money, I take that $75k and put it towards another property.

I C.
Another question, is it true that mortgage brokers tend to benefit the consumers more than the major banks (more mortgage friendly)?

I cannot think of any reason you wouldn't use a mortgage broker to get either an investment or a personal mortgage.

I just don't know much difference between a non-bank-mortgage broker vs bank-mortgage rep.

Why would people still go for the bank for mortgage instead of non-bank mortgage broker?

I've been going to the same bank to get my mortgages for quite a few years. In doing that, I've built a relationship with the bank staff and get preferential service as a high value client. They either know me by name or at least recognize me by face. I receive extras such as waived fees, better rates, free services that normally cost money, preferred loan approvals, etc.

My original banker is now the supervisor of the department. Anytime I have feedback with their quality of service, I let her know and she takes care of it. If banks don't offer rates as low as mortgage brokers, they'll certainly consider it once they know you. Plus waive fees for secured lines of credit, ordering cheques, give you a safety deposit box, investment tips, etc. In return for service, I give them my business and send people over to them to start banking relationships.

They don't know to shop around. Or maybe they're like Sparkplug, trying to strengthen a relationship.

Most people's experience with banks is they'll try to soak you for the highest rate they can get. That's why they advertise a high rate, offer a medium rate to "preferred" customers, and offer their lowest rate through mortgage brokers to lure in the most price-concious customers. (That is basic marketing- attempting to stratify the customer base so you can charge difference prices for the same product).

As far as I'm concerned, if a mortgage broker does the work to get me the lowest rate, then he deserves my business. It's unfair to shaft him by going somewhere else so they can "consider" matching the rate they previously told me was impossible.

If I use Line of credit as downpayment to begin with, will I be able to consider its interest as interest expense IN ADDITION to mortgage interest when I do income tax calculation for the rental property?

Yes, that's how I do it and that's how my accountant writes up my taxes.

When I first started, I didn't have $50k in my pocket but I had the equity in my home. I used my secure line of credit for a downpayment and took out a mortgage for the balance. A while later, I had equity growth in two properties. I increased my line of credit to buy another piece of property. Then the real estate market really took off. My equity grew exponentially rather than linearly, so I took that equity and bought some more.

I've made some money, but I'm not sure this is the most efficient way of investing. You have to come up with a downpayment and mortgage fairly soon and you have to rent it out until you sell. It seems to me that putting a downpayment on new development in a hot market is even better. For example, you can put a deposit on a condo or house and you don't have to pay the balance until you take possession, which can take a year. That means your property has a year to go up in value (43% in Calgary in the last 12 months, which is effectively a 172% profit on your downpayment) and you don't have to deal with a tenant in the meantime. When possession date arrives, you sell. This is the advice my real estate lawyer gave me. He's dealt with many clients who do it this way.