Those looking to invest some money in hopes of a future payback may decide to buy some real estate and rent it out. When it comes to mortgages for an investment property, it is more complicated than if you are buying a home to live in. A down payment of 20% or more is required, and  here are two primary drivers that will determine how your investment property mortgage will take shape.

Number of units

A big consideration when you are considering investment property is how many units there are in the building. Single unit rental properties are not default insurable, while 2-4 unit rental properties are. Default insurance can be costly, but it reduces risk for lenders, who will in turn offer lower rates when default insurance is in place. 

If the property is a single-unit rental property, the mortgage is considered un-insurable (just like refinance transactions) and the uninsured mortgage rates will apply.

If the property is a 2-4 unit rental, default insurance premiums may apply (even at 20% down payment).

Will any of them be owner occupied?

Another consideration is if you will be living in one of the units. If so, it is considered owner-occupied. In Canada, it is required to have a minimum 20% down payment on non-owner-occupied investment properties. For owner-occupied properties, a down payment of as little as 5% may be enough. 

If the property is partially owner-occupied, it then qualifies for default insurance, and qualifies for the minimum down payment (which could be as low as 5% on properties valued $500,000 or less). With default insurance also comes the maximum 25 year amortization period. If the mortgage is not default insured, the amortization can be extended up to 35 years. The amortization period will have a direct and significant effect on the mortgage payment amount, as well as the total amount of interest paid over the life of the mortgage.

Mortgage rates for investment property

For most borrowers, most of the time, the mortgage rate on a rental property will be close to the same mortgage rates as owner-occupied properties.

That being said, as with all other aspects of lending, it essentially comes down to risk. It is generally accepted that people care about the home they live in if they own it. Renters (as an unfair generalization) do not maintain a property as well as an owner would, and rental properties are therefore classed as higher risk. Additionally, single-unit rental properties no longer qualify for default insurance, which significantly lowers lender risk. Add the two factors together (riskier occupant; riskier borrower) and it adds up to - you might guess - higher risk. With higher risk usually comes higher rates.

There are too many variables to quote an interest rate on a rental property without having the full particulars of the borrowers and any properties they own, including any other rental properties.

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