Mortgage Blog

How Much Mortgage Can I Afford for Investment Property in Canada?

October 24, 2024 | Posted by: Tim Belanger

Investing in real estate can be a profitable venture for some, especially if the right strategy is involved. However, one of the most common questions that real estate investors ask themselves before making a real estate purchase is: “How much mortgage can I afford for an investment property?”. So, let’s examine the factors that affect mortgage affordability in Canada for an investment property. This includes your debt-to-income ratio, rental income, size of a down payment and your credit score.

In this blog, we will then discuss each one of these factors in detail as well as provide you with tips to help you make an informed decision.

Key Factors That Affect Your Investment Property Mortgage Affordability

Investing in real estate can be profitable for some, especially if the right strategy is involved. However, one of the most common questions that real estate investors ask themselves before making a real estate purchase is: 'How much mortgage can I afford for an investment property?' So, let's examine the factors that affect mortgage affordability in Canada for an investment property. This includes your debt-to-income ratio, rental income, size of a down payment, and credit score.

In this blog, we will discuss each of these factors in detail and provide tips to help you make an informed decision.

1. Debt-to-Income Ratio for Investment Property

Suppose you own or rent and are considering getting a mortgage on an investment property. In that case, keeping your debt-to-income (DTI) ratio down is essential because this number is often used as a universal method for assessing mortgage approval. Here's what you need to know about your DTI.

How to Calculate your DTI?

The DTI ratio is calculated by dividing your total monthly debt payments by your gross monthly income.

Formula: (Monthly Debt Payments ÷ Gross Monthly Income) x 100 = DTI

What is the Preferred DTI for Investment Properties?

Most Canadian lenders prefer a DTI ratio between 35% to 45% for investment properties. The lower your DTI, the better your chances of getting mortgage approval.

Consider paying down some of your existing debts before lodging an investment property mortgage to bring this ratio down. This will increase your affordability and make you a more attractive borrower. If you're exploring the best way to finance home renovations in Canada, reducing your debt-to-income ratio will also improve your financing options.

2. Rental Income Impact on Mortgage Affordability

When you invest in rental properties, your rental income can increase your mortgage affordability. Here's how:

Consider your Rental Income

Canadian lenders often consider a portion of your expected rental income when assessing your application. In most cases, up to 80% of your rental income can be used to offset your mortgage payments. This can significantly enhance how much mortgage you can afford for an investment property.

Income Verification

To include rental income in your mortgage application, you'll need to provide documentation such as rental agreements or an appraisal report indicating the potential rental income for the property.

Example:

If you're buying a property that generates $2,000 per month in rental income, the lender might consider 80% of that, or $1,600, as additional income when evaluating your mortgage affordability.

3. Down Payment for Investment Property in Canada

Investment properties typically require a higher down payment than purchasing a primary residence.

Minimum Down Payment:

You must provide at least 20% of the purchase price as a down payment for an investment property in Canada.

Example:

For a property priced at $400,000, you'll need a down payment of $80,000.

• Why a Higher Down Payment?
• A higher down payment reduces your loan amount, making your mortgage more affordable by lowering your monthly payments and interest expenses.
• Boosting Mortgage Approval Chances:
• Offering a larger down payment can also improve your chances of approval, as lenders view it as a sign of financial stability.

4. Credit Score for Investment Property Mortgage

Your credit score is a critical factor when applying for an investment property mortgage:

• Credit Score Threshold:
• A credit score of 680 or higher will typically qualify you for more favorable mortgage rates and terms.
• Improve Your Credit Score:
• If your credit score is below 680, consider improving it before applying. This includes paying off credit card balances, avoiding new debts, and ensuring timely bill payments.

Why It Matters:

A higher credit score allows you to access lower interest rates, which reduces your total loan cost and makes your monthly payments more manageable. This is essential if you're also looking for mortgage agents near me to assist with your financing needs.

1. Interest Rates and Loan Terms

When calculating how much mortgage you can afford for an investment property, the interest rate and loan term also play a significant role:

• Fixed vs. Variable Rates:
  • Fixed-rate mortgages offer stability with consistent payments over the term.
  • Variable-rate mortgages may start with lower rates but can fluctuate, impacting your affordability if rates rise.
• Choosing the Right Loan Term:
• A shorter loan term (e.g., 15 years) means higher monthly payments but less interest paid over time. A longer-term (e.g., 30 years) spreads payments out, lowering monthly costs but increasing the total interest paid.

Other Considerations for Canadian Investors

While the factors above are the most critical, don't forget to account for:

• Monthly Expenses:
• Your monthly mortgage payment is just one cost. Include property taxes, insurance, and maintenance in your affordability calculations.
• Vacancy Periods:
• Factor in the possibility of rental vacancies, which may temporarily affect your ability to cover mortgage payments. Build a buffer for such scenarios.

Conclusion

There are several particularities to consider when figuring out how much mortgage you can get for an investment property in Canada. Some of those include debt-to-income ratio for investment property, rental income on mortgage affordability, Down payment for investment property, credit score for investment property mortgage, and loan term. The knowledge of those details is important as it will assist you in making the right financial moves and lead to your success in property investment.

Ready to Invest in Canadian Real Estate?

Our Belanger Mortgages Investment Property Mortgage brokers are experts in investment property mortgages, and are ready to get you the best rates on your next investment. Talk to one of our mortgage broker agents at one of our many locations nationwide for advice today. Contact us if you want to know about renovation mortgage financing in Canada or need advice on the best way to finance your home renovations in Canada. We are here to help.

FAQs

How does my debt-to-income ratio affect my mortgage approval for an investment property?

Your DTI shows lenders your ability to manage mortgage payments along with other debts. A lower DTI increases your chances of approval.

Can I use rental income to qualify for a bigger mortgage?

Yes, most Canadian lenders consider up to 80% of expected rental income when determining your mortgage affordability.

What’s the minimum down payment for investment properties in Canada?

You’ll need at least a 20% down payment to purchase an investment property.

Does a higher credit score improve my mortgage rates?

Yes, a credit score of 680 or higher qualifies you for lower interest rates and better mortgage terms.

What other costs should I consider besides the mortgage payment?

Be sure to account for property taxes, insurance, maintenance, and any potential vacancy periods when planning your investment property budget.

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