Mortgage Blog

How to Buy an Investment Property When You Have a Mortgage

October 24, 2024 | Posted by: Tim Belanger

Can you buy an investment property if you're already paying your mortgage on a home in Canada? And if so, how does it work? The short answer is yes. You can buy an investment property without selling it, even if you still owe money on your mortgage.

However, it's worth noting that loans for investment properties in Canada differ from loans for buying a home. Lenders generally view investment homes as more risky, so they have stricter rules and requirements for those looking to buy a property to rent out. Some of these differences include higher down payments, more stringent income qualifications, and sometimes higher interest rates. However, this process can work for you if you approach it strategically with the right mindset and broker.

Let’s Find out How to Buy an Investment Property When You Have a Mortgage

Buying an Investment Property When You Have a Mortgage

1. Using Home Equity for Investment Property

One of the best ways is using home equity for investment property. The longer you own your home, the more its value grows and the more equity you'll have as you pay off your mortgage.

Historically, home equity was calculated as the current value of your home minus what you owed on your mortgage; today, you can access your equity through a home equity line of credit (HELOC) or by refinancing your mortgage.

Here's how it works:

• Home Equity Line of Credit (HELOC): This allows you to borrow against the value of your home. You can take out only what you need, and interest is only charged on the amount you use.

• Mortgage Refinance: You can replace your existing mortgage with a new one at a higher amount to pull out the equity you've built in your home.

These strategies give you access to funds without needing to take out an entirely separate loan, which can often simplify the process.

2. Mortgage Requirements for Investment Property

If you are seeking a mortgage to buy an investment property in Canada, you'll need to meet stricter mortgage requirements for investment property criteria. That's because the bank sees your investment property as a riskier mortgage—if times got tight and something had to give, they'd rather ensure you repaid your mortgage on your home rather than the property that you're renting out. Always ask yourself how much mortgage I can afford for an investment property because this understanding is crucial, as this will impact your ability to meet these stricter requirements and manage both properties successfully.

Here are the major mortgage requirements for investment property you need to meet:

• Credit Score: A good credit score is crucial. Typically, you'll need a score of at least 700 to qualify for the best rates.
• Down Payment: You'll need to make a larger down paymentfor an investment property—generally at least 20%, but sometimes up to 30%.
• Debt-to-Income Ratio: Lenders will assess your debt-to-income ratio to ensure you have enough income to cover both your existing mortgage and the new loan. This ratio represents how much of your income goes towards paying off debt. Generally, it should not exceed 43% of your gross monthly income.
• Income and Employment: Lenders will want to see steady income and employment history. The more stable your income, the more likely you are to get approved.
• Rental Income: Some lenderswill consider up to 70% of the expected rental incomefrom your investment property when calculating how much they're willing to lend you. This can help you qualify for a larger loan.

3. Investment Property Loan Pre-Approval

Before looking for an investment property, it is best to get an InvestmentProperty Loan Pre-Approval. A pre-approval lets you know how much you can qualify for before looking for a house; based on your income, credit score, and current debt, a lender can tell you a good amount you can borrow for a home.

Additionally, if you are looking for a property in a competitive market, obtaining pre-approval shows the seller you are serious about purchasing, which may give you an advantage over buyers who aren't quite ready.

During the pre-approval process, the lender will review:

• Your credit history
• Income and employment stability
• Current debts and obligations
• Potential rental income from the investment property

This step will provide clarity on your purchasing power and set a clear budget for your search.

4. Landlord Insurance for Investment Property

Once you've purchased your investment property, you'll need to protect it with landlord insurance. Landlord insurance for investment property is different from regular homeowner's insurance because it's designed for properties that are being rented out. It covers:

• Property damage (from fire, storms, or other natural events)
• Liability coverage (if a tenant or visitor is injured on the property)
• Loss of rental income (if the property is damaged and you can't rent it out while repairs are being made)

Investing landlord insurance for investment property protects you from unexpected issues that could impact your property and rental income.

How to Increase Your Borrowing Capacity

Take these steps to increase the chances that you'll get a better mortgage deal and borrow as much as you can.

1. Improve Your Credit Score

Pay off as much debt as possible, and make sure you pay your bills regularly and punctually. A good credit score will be an asset when you apply for your mortgage.

2. Lower Your Debt-to-Income Ratio

A common problem for those considering whether to buy an investment property is that your debt-to-income ratio might need to be lowered to pass mortgage lending requirements. If that's the case, try to pay down existing debts or increase your income with some side job or raise.

3. Increase Your Down Payment

A larger deposit will mean you have less to borrow, which makes you more attractive to a lender, and it will also mean lower monthly mortgage repayments.

4. Ensure Steady Employment

Stable employment and a longer track record of employment help lenders see you as a lesser 'risk.' If you only started your job a few months ago, it might be a good idea to wait for a bit longer before you apply for the mortgage.

Conclusion

While buying an investment property when you already have a mortgage can be challenging, it is achievable with the right approach. By using home equity for investment property, understanding the mortgage requirements, and preparing your finances, you can confidently pursue your investment goals. Knowing how much mortgage you can afford for an investment property is key to making informed decisions and managing both properties effectively.

At Belanger Mortgages, we specialize in guiding Canadian investors through securing Investment Property Mortgages. With our expertise, we’ll help you navigate the complexities, ensuring you work with the best mortgage company near me and find additional support, like a home insurance broker in Ottawa, for your investment.

Contact Belanger Mortgages today to get started on your investment journey!

FAQs

Can I Use My Home Equity to Buy an Investment Property?

Yes! You can use a home equity line of credit (HELOC) or refinance your mortgage to access the equity in your current home for your investment property purchase.

What Are the Down Payment Requirements for an Investment Property?

Most lenders in Canada require a minimum down payment of 20% for an investment property, but it can be as high as 30%, depending on your financial situation.

Will Rental Income Help Me Qualify for a Larger Mortgage?

Yes, lenders may consider up to 70% of your expected rental income when calculating how much you can borrow, which can significantly increase your borrowing capacity.

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