Real Estate

Bank mortgage calculation on Rental (Investment) properties

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[OP]
Member
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Jan 24, 2010
324 posts
109 upvotes
Toronto

Bank mortgage calculation on Rental (Investment) properties

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 ?
25 replies
Deal Addict
Mar 14, 2018
1071 posts
1043 upvotes
GTA
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.
Sr. Member
Nov 8, 2011
764 posts
495 upvotes
Etobicoke
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?
Deal Fanatic
Apr 5, 2016
5978 posts
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Calgary/Vancouver
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.
Deal Addict
May 23, 2006
1574 posts
587 upvotes
Vancouver
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.
Deal Fanatic
May 22, 2003
8737 posts
5593 upvotes
Vancouver
We're going through this right now. Yes, interest rate on rental investment property will be higher than on a principal residence
Deal Fanatic
May 22, 2003
8737 posts
5593 upvotes
Vancouver
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
Sr. Member
Oct 14, 2010
717 posts
801 upvotes
Toronto
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
Sr. Member
Oct 14, 2010
717 posts
801 upvotes
Toronto
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).
Deal Addict
May 23, 2006
1574 posts
587 upvotes
Vancouver
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.
Deal Addict
Sep 13, 2016
3464 posts
2238 upvotes
Mississauga
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.
Sr. Member
Nov 8, 2011
764 posts
495 upvotes
Etobicoke
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.
Sr. Member
Nov 8, 2011
764 posts
495 upvotes
Etobicoke
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?
Deal Fanatic
Apr 5, 2016
5978 posts
4425 upvotes
Calgary/Vancouver
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.
Deal Fanatic
Apr 5, 2016
5978 posts
4425 upvotes
Calgary/Vancouver
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.
Jr. Member
Dec 3, 2017
189 posts
142 upvotes
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.
Deal Addict
May 23, 2006
1574 posts
587 upvotes
Vancouver
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.
Deal Fanatic
Apr 5, 2016
5978 posts
4425 upvotes
Calgary/Vancouver
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.
Jr. Member
Oct 10, 2020
114 posts
73 upvotes
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
Member
Feb 15, 2018
444 posts
546 upvotes
Edmonton
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.
Edmonton area Realtor

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