Rental/Income Property Mortgages
Buying a second home that you can rent to the tenant for passive income is a great way to plan your retirement. But, how do you finance your rental home? The conditions for financing your second property are different when you intend to use it for rental purposes. Before purchasing rental property, you need to keep the following things in your mind:
- You need a minimum down payment of 20% to get a rental property mortgage. This amount should come from the existing home’s equity or your savings. You can’t use gift money towards the down payment, certain exceptions may apply.
- The minimum down payment required for an owner-occupied duplex is 5% with mortgage default insurance from one of three Canadian companies – CMHC/Sagen/Canada Guaranty.
- How much rental income is added to your total income to decide whether you are an eligible candidate for the mortgage is up to the lender. They might add as little as 50% of your rental income or include the full income. Every lender has their own policies when it comes to rental income.
- Some lenders also put limitations on the number of rental properties you can own.
- You will have to pay interest with an added premium if it is your second property that you intend to rent to someone or sell in the future. This premium can be anywhere between 0.10% and 0.20% on a 5 year fixed term.
- Remember that selling this property in the future will result in capital gains tax. You must work with your accountant to understand the write-offs and tax requirements for your rental and income properties.
