Mortgage Blog

How Much Higher Are Investment Property Mortgage Rates?

October 24, 2024 | Posted by: Tim Belanger

Purchasing an investment property can be a wise way to increase your wealth, but it's not the same as purchasing a primary home because the mortgage rates on investment properties are typically higher and the loan requirements are more stringent.

This is not to argue that you shouldn't look into investing in real estate. Before you enter the world of real estate investing, t just makes sense to be aware of the expenses and requirements, especially considering factors like the current mortgage rates Ottawa investors might encounter.

Why are mortgage rates on investment properties higher?

Compared to loans for primary residences, investment loans carry greater risk. Compared to other property types, homeowners have the lowest likelihood of defaulting on their mortgage for their own house, according to mortgage lenders. This is an important factor whether you’re dealing with Canada Trust Mortgage Company or other lenders across Canada.

It should be noted that risk adjustments are applied to all interest rates for factors including poorer credit scores, different down payment amounts, and whether or not the property is a multi unit condo. When it's an investment, there's also an occupancy risk adjustment. Since the owner resides in their principal residence, there is a greater presumed risk that, in the event of default, they may default on an investment property before their primary residence.

However, a source of income is not certain. Tenants must be found for the property, and there's always a possibility that they won't pay you back in full. Even in that case, lenders must make sure you have sufficient funds on hand to cover your mortgage payments. This means evaluating the best mortgage life insurance Canada has to offer, which can further protect your investment.

All of these are classified as 'volatility risks.' It is beyond your control to prevent vacancies or a decline in rent. Lenders increase the interest rates on loans for investment properties as a kind of compensation.

What are the current mortgage rates for investment properties?

Traditionally, investment rates are believed to be 0.5% higher with a 25% down payment and 1.5% higher with a 20% down payment than those for primary residences. This can vary based on where you are in Canada, and those looking for the best mortgage rates Ottawa Ontario might find slight differences based on local competition and financial conditions.

According to Freddie Mac, the average mortgage rate at the moment is roughly 6.875%, however this figure can change depending on your lender, the type of loan you have, and your financial circumstances.

A borrower with excellent credit who qualifies for the most competitive investment property rate might earn 7.5% based on that average. A rate of about 8% may be given to someone who receives a higher rates.

Investing in real estate now can provide you with the opportunity to generate rental income that, based on market rental rates, may even be sufficient to pay your mortgage. As you accumulate equity in the home, your tenants would essentially be covering your mortgage. The best way to finance home renovations in Canada could also play a key role in managing your property effectively and increasing its value over time.

Your next investment and the one after that can be financed in part by the equity you accumulate in this property. Therefore, even though your interest rate is higher than it is on your primary residence, the profits you realize could easily outweigh the costs.

Mortgage requirements for investment properties

Lenders want to know that you have the means to pay the monthly mortgage and all other expenditures related to the property, such as taxes, upkeep, and maintenance, in addition to the standard expenses of owning an investment property, including tenant recruitment advertising.

Thus, not only are mortgage interest rates higher, but they may also have more qualifying standards than mortgages for principal residences.

The following are likely things that lenders will want to see in an investment property transaction:

Credit score requirements for investment loans

Generally speaking, lenders will look for a minimum credit score of 620 on an investment property transaction. This is the same credit score that conventional primary residence loans require, but for some lenders, that's just the minimum; others may require a 640 or higher, and you may need a 700 or higher to be eligible for more competitive interest rates.

Higher down payment for Investment Property

Because of the increased risk involved, investment property mortgages also require a higher down payment than primary residence loans. Most lenders will demand at least 10% down if you are purchasing a vacation house for yourself with the intention of renting it out while you aren't using it.

But, you might require more if you are purchasing a home or multifamily property solely as an investment.

Your lender may demand up to 25% for a multifamily property with up to four units and 15% for a single-family home when you apply for a conforming investment property loan.

Investment Property Loan Requirements

Lenders need assurance that you can cover all the costs associated with owning an investment property, including the mortgage, property taxes, maintenance, and more. Unlike primary residence mortgages, investment property loans often come with higher interest rates and stricter financial requirements.

Key Lender Requirements for Investment Property Mortgages:

• Higher Credit Score: Minimum credit score: 620, similar to conventional primary residence loans. Some lenders may require a 640 or higher, and competitive interest rates often require a score of 700 or more.
• Higher Down Payment: Vacation homes rented out part-time may require at least 10% down. For single-family homes bought exclusively as investments, expect a 15% down payment, while multi-unit properties may require up to 25%.
• Larger down payments (25% or 40%) often lead to better interest rates.
• Cash Reserves: Lenders will require cash reserves due to the higher risk of investment properties.

Tip for First-Time Investors

If you’re a first-time homebuyer, consider purchasing a multifamily property with up to four units. Live in one unit and rent the others. You’ll benefit from primary residence mortgage rates while earning rental income and facing less strict borrower requirements.

By understanding and preparing for these requirements, you’ll be in a stronger position to secure financing for an investment property and make your real estate venture a success.

How to Get a Better Investment Property Mortgage Rate

Securing a lower mortgage rate for an investment property depends on more than just market conditions. Your financial profile plays a key role. Here’s how you can improve your rate:

• Improve Your Credit Score: Pay bills on time and reduce debts to lower your credit utilization. A higher credit score often leads to better rates.
• Increase Your Down Payment: Putting down more than the minimum lowers the lender's risk and can result in a lower interest rate.
• Live in a Multifamily Property: Buy a multifamily home and live in one unit. Owner-occupied loans offer better rates and generate rental income.
• Rent Your Primary Residence Later: Buy a home as a primary residence, then rent it out later. Initially, you benefit from lower rates and can earn rental income down the line.

By improving your credit, increasing your down payment, and using strategic owner-occupied options, you can secure a better mortgage rate for your investment property.

Find out What is the Interest Rate for Investment Property Mortgage today! Also if you are a first-time buyer, there is good news for you. We, Belanger Mortgages are the best mortgage company for first-time home buyers. Contact Belanger Mortgages as it could be the best mortgage company near you,come to us for expert advice and tailored solutions. Let us help you secure the perfect loan!

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