Bank mortgage calculation on Rental (Investment) properties

They do the same stress test, but the important factor will be your income to debt ratio.

Given whatever income and debt payments you have now, if you apply for a mortgage on a rental property, they will then add the potential rent as your additional income and the mortgage payment + condo fees + tax, etc. as additional debt payment. The new ratio has to meet the criteria.

Note that you need at least 20% downpayment and also the interest rate will be higher than with principal home.

clutch31 wrote: ↑ They do the same stress test, but the important factor will be your income to debt ratio.

Given whatever income and debt payments you have now, if you apply for a mortgage on a rental property, they will then add the potential rent as your additional income and the mortgage payment + condo fees + tax, etc. as additional debt payment. The new ratio has to meet the criteria.

Note that you need at least 20% downpayment and also the interest rate will be higher than with principal home.

What happens with mortgage rates in a scenario where say you have a 5 year fixed rate that was used to purchase house 1, live in it for 2 years, then put it on rent while you purchase house 2?

Would house 2, that you now intend to use as principal residence does it get hit with higher mortgage interest rate?

DToronto wrote: ↑ What happens with mortgage rates in a scenario where say you have a 5 year fixed rate that was used to purchase house 1, live in it for 2 years, then put it on rent while you purchase house 2?

Would house 2, that you now intend to use as principal residence does it get hit with higher mortgage interest rate?

Nope. Principal residence mortgage rate for house 2. Do it all the time. The best part is, the previous mortgage is still tagged as principal residence so you get lower rates for both. Then just keep buying houses and switching principal residence. Using rental offset to cover mortgage payments. This is how people keep buying houses. Just front up the 20% DP per house.

People talks about additional leverage with real estate investment purchase all the time.

But with the stress test, the only additional mortgage from a purchase of investment property is = Amount of yearly rent x 5?

Say, a property worth $1 million can be rented for $3k per month.....so the purchase of that investment property would really just allow the buyer to get a mortgage of $180,000 ($3k x 12 x 5).....which is fairly small in relation to a $1 million investment.

We're going through this right now. Yes, interest rate on rental investment property will be higher than on a principal residence

Fantastical wrote: ↑ People talks about additional leverage with real estate investment purchase all the time.

But with the stress test, the only additional mortgage from a purchase of investment property is = Amount of yearly rent x 5?

Say, a property worth $1 million can be rented for $3k per month.....so the purchase of that investment property would really just allow the buyer to get a mortgage of $180,000 ($3k x 12 x 5).....which is fairly small in relation to a $1 million investment.

An expert can chime in, but I don't think this is correct. For example we are looking to buy a rental property around 700k. Making 20% (140k) down payment and getting a mortgage for 560k. Estimated rent between 2.5k-3k/month

Fantastical wrote: ↑ People talks about additional leverage with real estate investment purchase all the time.

But with the stress test, the only additional mortgage from a purchase of investment property is = Amount of yearly rent x 5?

Say, a property worth $1 million can be rented for $3k per month.....so the purchase of that investment property would really just allow the buyer to get a mortgage of $180,000 ($3k x 12 x 5).....which is fairly small in relation to a $1 million investment.

Lol, no. Amount of leverage you get is not calculated using the rent you will get

jay_jay wrote: ↑ Hello,

I understand they do stress test with higher interest rate for buying a house.
Does it apply to buy investment house also ?
SAme way the amount of mortgage on buyers is under 5 times of their salary. would they apply the same rule for buying an investment property. or the calculations are different ?

Simular calculations with taking a look at your total debt load and income.
Interest rate typically slightly higher (0.15%ish higher).

Can someone chime in is this do-able?

Assuming the only income is from the rent.

notenoughsleep wrote: ↑ An expert can chime in, but I don't think this is correct. For example we are looking to buy a rental property around 700k. Making 20% (140k) down payment and getting a mortgage for 560k. Estimated rent between 2.5k-3k/month

Fantastical wrote: ↑
People talks about additional leverage with real estate investment purchase all the time.

But with the stress test, the only additional mortgage from a purchase of investment property is = Amount of yearly rent x 5?

Say, a property worth $1 million can be rented for $3k per month.....so the purchase of that investment property would really just allow the buyer to get a mortgage of $180,000 ($3k x 12 x 5).....which is fairly small in relation to a $1 million investment.

I understand it works like this.
> Lets say your current income is 8K a month, before taxes.
> The market rates for rent for the investment property you are buying is 2K a month. Minus say 500 towards condo maintenance etc.
> So the bank would add this and consider 8K+1.5K to be your net income.
> Now income to debt ratio calculations would apply on 9.5K income a month.
Any current mortgage, and other debt that you have would reduce the amount of mortgage you can get.

IndyBeak wrote: ↑ I understand it works like this.
> Lets say your current income is 8K a month, before taxes.
> The market rates for rent for the investment property you are buying is 2K a month. Minus say 500 towards condo maintenance etc.
> So the bank would add this and consider 8K+1.5K to be your net income.
> Now income to debt ratio calculations would apply on 9.5K income a month.
Any current mortgage, and other debt that you have would reduce the amount of mortgage you can get.

This is my understanding as well.

bomber17 wrote: ↑ Nope. Principal residence mortgage rate for house 2. Do it all the time. The best part is, the previous mortgage is still tagged as principal residence so you get lower rates for both. Then just keep buying houses and switching principal residence. Using rental offset to cover mortgage payments. This is how people keep buying houses. Just front up the 20% DP per house.

Thank you, this helps. So when your mortgage is up for renewal, at that time the property not declared as principal residence would be hit with higher interest rates, correct?

DToronto wrote: ↑ Thank you, this helps. So when your mortgage is up for renewal, at that time the property not declared as principal residence would be hit with higher interest rates, correct?

Yes, if it was originally done as a rental property, it will be renewed with higher rates.

However, if it is indeed a principal residence, you could tell the bank you switched properties, they will get you to sign a declaration of resident occupancy. One note though, they may then tag the remaining properties as rental then, so YMMV.

Some banks allow rental offsets. For example

$600k condo with 20% down
$480k mtg = $2633/mo

$3000 rent - $2633 - $150 pptx - $100 heat - $400 condo fee = -283 shortfall

Then you minus $283 from your income. We pretty much eliminated a $480k mtg with expenses out of your debt servicing.

IndyBeak wrote: ↑ I understand it works like this.
> Lets say your current income is 8K a month, before taxes.
> The market rates for rent for the investment property you are buying is 2K a month. Minus say 500 towards condo maintenance etc.
> So the bank would add this and consider 8K+1.5K to be your net income.
> Now income to debt ratio calculations would apply on 9.5K income a month.
Any current mortgage, and other debt that you have would reduce the amount of mortgage you can get.

The bank only calculates 50% of your rental income as revenue.

Which bank would do that? and would that result in higher interest rate?

This essentially by pass the 5 x income stress test.

bomber17 wrote: ↑ Some banks allow rental offsets. For example

$600k condo with 20% down
$480k mtg = $2633/mo

$3000 rent - $2633 - $150 pptx - $100 heat - $400 condo fee = -283 shortfall

Then you minus $283 from your income. We pretty much eliminated a $480k mtg with expenses out of your debt servicing.

mdarwash wrote: ↑ The bank only calculates 50% of your rental income as revenue.

Certain banks like BMO take 80% rental income for GVA/GTA properties. Everywhere else is indeed 50%.

Fantastical wrote: ↑ Which bank would do that? and would that result in higher interest rate?

This essentially by pass the 5 x income stress test.

There are a couple banks that do rental offsets but I can't remember which ones. I know for sure BMO is one of them. I think RBC as well. If it's a new rental property, then you'll be subjected to rental property interest rate, which is really only 0.1-0.2% difference. If the subject property is primary residence, then no higher interest rate.

sorry to hijack this post but question - how does mortgage interest rate change if your first property = investment property? So living at home, and getting a place for the purpose of investing

mdarwash wrote: ↑ The bank only calculates 50% of your rental income as revenue.

Different lenders calculate rental income offset differently. OP needs to talk to a mortgage broker who specializes in these types of mortgage. Think Financial gave me 100% rental offset a few years ago - not sure if that is still the case these days.