How To Qualify For Bigger Mortgages For Toronto Investment Properties
Introduction
Potential investors these days might be feeling a bit trapped. Even if there are great deals, you might not be able to qualify because interest rates have gone up so much. If you’re feeling stuck, you’ll want to understand more about what goes on with mortgage qualifications so that you can figure out ways to change things up. And if you’re just starting out, this might be even more important so you know what the best roadmap might be for long-term success.
So stay tuned to learn more about the most common mortgage problems that investors run into and how you might be able to restructure things to improve your total borrowing capacity.
Principal Residence Impact On Future Mortgage Qualifications
The most basic way that banks look to qualify you for mortgages is to see how well you can pay for your expenses and mortgage payments stacked against how much you make, and there are two main ratios to look at.
The first one compares the payments on the property you want to buy only. The second one is usually the tougher one, which looks at all of your existing debt and payments, plus the new property, stacked against your income. These ratios typically need to be below a certain percentage before the banks say “okay” to lending you money. And so, if you want to maximize the amount you can borrow for investment properties, the basic concept is to improve your income and reduce your debt.
Image: RateHub
Honestly, the top reason that most people are stuck is because they are front-loaded with debt on their own home. Of course, an expensive house is nice, and I can’t say it’s a bad decision, but it does mean that it takes up a big chunk of your qualifying income. And unlike rental properties, it doesn’t give you extra income to balance out the ratio.
Take a look at this example. If you have an income of $200,000 and you have a $1.3 million mortgage on your home, you will end up being completely maxed out on your mortgage ratios, which means you won’t be able to borrow any more money for a rental property. On the other hand, if you only take on a $700,000 mortgage on your home, then you would be able to qualify for a $700,000 on an investment property because it also generates income to help with your ratios. And if you compare the two, your absolute appreciation ends up being higher because your total property value is greater. You also get rental income and you have better cash flow, so it all in all ends up being a better financial decision if you choose a smaller home to live in.
If you already own a home but you want to qualify for a bigger purchase. Selling and buying a smaller home might not be the best idea because you’ll be hit with an extra set of land transfer taxes and selling fees, and you might end up getting much higher mortgage rates these days. Here’s the thing: your own home doesn’t need to be dead weight. If you are willing to rent out part of your house, then it can be turned into an income-generating asset and improve your ratios.
Here are a few examples: If you rent out a one-bedroom basement in Toronto, you can get around $1,600 per month today. That’s almost $20,000 of extra income per year, and that can improve your borrowing ability by $100,000. A 2-bedroom basement will bump this up even more.
Now let’s go extreme. You can really maximize the rentable space of your home in Toronto if you add a laneway or garden suite in the back. If you do that and you rent out your basement as well, that’s probably the best way for you to improve your mortgage ratios—a backyard 2-bedroom house can rent for $3400, plus a $1600 basement apartment. This means an extra $5,000 of rental income per month, or $60,000 per year!
House vs. Condo Investment Property
Here’s another situation that we sometimes see. Investors would have their own home and a condo investment, and because condos don’t cash flow very well, it’s hard to qualify for another mortgage after that.
Take a look at this example. Let’s say you own a home that you’ve been paying down, and so you currently have a $500,000 mortgage on it. You also own a big condo rental property, which has a $700,000 mortgage and gives you $3,800 in rent a month. In our current market conditions, you can only qualify for a $600,000 in a new mortgage, which still limits you to condos in Toronto. If you had a house rental with a similar mortgage as the condo, you could actually get much better rent at $5,000 per month. This $1,200 rent bump would be the difference that’s needed to help you qualify for a $700,000 mortgage and the difference between being able to invest in a house instead of a condo next.
The big difference between a house and a condo, however, isn’t just about asset value and rental income; it may also end up being the difference in qualifying for more mortgages in the future. And when you have better rental income on the property, that might be the difference that’s needed to actually get you the next mortgage and then help you snowball your growth faster, if that’s the path you’re looking to go.
For example, some banks can use the DCR program to qualify you for more rental properties, as long as your total portfolio cash flows well enough. In this case, it would be much more likely to be able to qualify for the DCR program if you have houses instead of condos.
Why The Order Of Purchase Matters
Restructuring Your Real Estate Portfolio
Finally, let’s talk about repositioning assets. If you already own a condo investment, you might be in a tougher spot because selling a condo to buy a house would mean getting hit with an extra set of extra fees, land transfer taxes, and capital gains taxes.
I think in this case, you should think about how long you’d be holding the investment for and whether you’re looking to grow more beyond this point. If you want to buy more properties and have stronger cash flows and holding power in the long run, it still makes sense to make the switch. And it’s probably a better idea to switch sooner than later.
How We Can Help
We’re a real estate sales brokerage that focuses on investing in freeholds in core Toronto, but before we can start helping you buy, it’s up to you to figure out what the buying sandbox looks like. As a result, the first step for you is always to determine how much you can borrow.
Not all banks are the same, and some banks and mortgage agents are definitely more investor friendly. So if you need help with getting started with real estate investing, we’d be happy to put you on the right track.
We’re a real estate sales brokerage focused on investing in real estate in Toronto, and we can start off with taking a look at your existing situation, help you figure out what’s best for you, and point you to the right lenders to get things started. Once you’re ready to buy, we’ll show you different opportunities from a numbers, time, and work commitment standpoint, which helps you make better investing decisions.
After we help you buy it, our team also provides renovation guidance, leasing and property management if you need it. So, just connect with us if you want to learn more about our services!
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