The 2010 changes to the CMHC insured mortgage rules requires that rental properties cannot be financed beyond 80% loan to value under an insured mortgage program.
This has effectively changed the game when it comes to using third party financing to secure rental properties. It wasn’t that long ago that rental properties were being financed under insured mortgages at or near 100% of the fair market value of the real estate.
Another area of change that has taken place is the amount of “offset” a lender will consider for debt servicing. This basically is the percentage of rents collected that can be used to cover off the monthly mortgage payment. This has been upwards of 80% of the rental income, but has need reduced to 50% by many mortgage lenders.
For most bank or institutional lenders, the maximum lending amount outside of insured mortgages is 80% anyway, although certain mortgage lenders will still require mortgage insurance for certain categories of rental properties.
The end result is that the cheaper forms of money cannot be utilized to provide high ratio rental property mortgages. This of course does not preclude a seller or private individual to provide a higher loan to value rental property mortgage, but likely at a higher cost of money.
For bank or institutional investors, rental mortgage applications for rental property purchases will typically require a copy of MLS listing, the offer to purchase, a statement of income and expense, a rental roll if there is more than one tenant, copies of leases or rent agreements in place, and a current real estate appraisal completed by a licensed appraiser.
Both fixed and variable interest rates are available for Toronto rental property mortgages. The choice of what to choose is really an individual business decision. In the short term, there may continue to be the opportunity to save on interest costs thus increasing the rental profits.
In the long term, if the rental income can cash flow a longer term fixed mortgage of 5 years or longer, then the rental property assures itself of being able to remain cash flow positive for a fixed period of time without the property owner needing to supplement the cash flow from outside sources.
Private mortgage lenders can also be a solution for Toronto rental property mortgages in a number of ways.
Similar to bank or institutional lenders, private mortgage lenders will consider financing for rental properties up to 80% loan to value.
While private mortgages are going to likely be more expensive than a bank mortgage, they typically only require interest only payments which can work out very similar from a cash flow perspective as compared to a lower cost bank mortgage that requires principal and interest to be paid on a monthly basis.
If the rental property requires renovations or repairs, a private second or third mortgage can be put in place to cover the costs of construction. At completion of work, the construction loan and other mortgage charges can be rolled into one new mortgage.
For quick close mortgage situations where a purchase needs to be completed in less time than a bank or institutional lender would require for providing a mortgage approval, a private mortgage solution can serve as a short term bridge financing solution for 6 months to a year, allowing the transaction to close as well as providing time for the borrower to locate and secure a more optimal long term rental property mortgage solution.
While private mortgages in general are for a term of one year, there are private mortgage lenders that will provide longer term financing for rental properties with either interest only or amortized payments.
In situations where bank financing can’t be secured due to credit or some other reason, but there is still sufficient net cash flow to service a private mortgage, a private loan can be a viable option for financing a rental property.
If you’re in need of a Toronto rental property mortgage, please give us a call a book a time to speak with a member of our team. We’ll spend the time necessary with you to understand your requirements and provide you with relevant rental property mortgage options for your consideration.