Whether you’re considering refinancing to add an apartment to your home or buying a multi-unit complex as an investment property, the number of units in a rental property and whether or not you reside in it has a significant impact on the mortgage conditions.
Here’s what buyers should know about getting a mortgage for rental properties.
Do Residential Mortgage Rates Apply?
Any building with four units or less is considered a residential property for mortgage purposes and most lenders will provide financing for these properties at competitive rates. A mortgage payment calculator can make it easy to compare rates while also adjusting the settings for the amount of the down payment, amortization period, and choosing between fixed or variable rates.
The lender will need to know if the borrower will be living in the property though to determine the minimum down payment required. If you will be living in a property with two units—say, for example, a house with a separate basement apartment—you can purchase the property with as little as 5 per cent down. But if the owner won’t be living in the property, the down payment will need to be at least 20 per cent.
If the building has three or four units, the down payment must be at least 10 per cent for owner-occupied properties and 20 per cent if the owner won’t be living there.
The size of your down payment also impacts the amortization period. With less than 20 per cent down the maximum amortization period is 25 years. With 20 per cent or more, that period can be bumped up to as long as 35 years.
How Commercial Mortgage Rates Work
Buildings with five or more units are generally considered commercial properties, though some lenders will apparently consider five- and even six-unit complexes as residential. Any property with more than four units requires a 20 per cent down payment. It’s worth noting that some smaller lenders don’t provide mortgages on commercial properties, meaning there’s less competition on rates.
The requirements to qualify for a commercial mortgage are more stringent, with tighter debt-service ratios and credit scores, and proof of rental income based on current leases or projected market value rents. Owner occupation doesn’t factor into commercial rental properties.
The costs of completing a commercial mortgage are also higher than residential mortgages including appraisal fees, property inspectors, and legal costs. Finally, would-be buyers of commercial property should also be aware that ongoing related expenses, such as insurance, property tax, and even garbage disposal are charged as higher rates. For example, the City of Toronto’s 2017 property tax rate for residential properties is 0.4802928 per cent of the assessed value of the property. But for older multi-unit residential properties, that number jumps to 1.2844065 per cent.
And for garbage and recycling purposes, the City of Toronto considers any property with nine or more units to be commercial, and charges for collection based on the volume (in cubic yards) collected.
Whether you’re in the market for a residential or commercial mortgage, a mortgage broker can help find the best rates and conditions that suit your needs.
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