CMHC is eliminating their second home program at the end of the months… so what is the fuss all about?
You have decided to purchase a second property, now the question is how to finance it?
At a first glance it would seem buying the second property as a rental is a no brainer! Rent will pay of the mortgage, you’ll have additional cash flow, etc… but wait… let’s see how the mortgage financing landscape has changed in the last 2 years:
Rental Property Purchase:
With the new rules in place and government putting pressure to cut back on risky lending, here are a few points to consider:
Down Payment:
You can still purchase a property with 20% down (The days of buying rentals with 5% down are long gone), but even at 20% you are limited to a few lenders who will offer the financing with no CMHC/Genworth/Canada Guarantee insurance premium.
If you want to avoid insurance premiums and have access to more lenders (and rates) you are looking at 25% down payment.
Rental Income for Qualification Purposes:
In the last 6 month majority of Banks and Monoline lenders have eliminated rental offsets for qualification purposes, and now are using 50% add back.
What does this all mean?
Offset is a preferred calculation for qualification purposes, in simple terms, a percentage of rental income is used to lower the expenses and the surplus or short fall is added to your debt servicing.
Add back is not as good because all the expense remain in liabilities and only a percentage of rent is added to your income.
Basically with add back you need a lot more income to debt service the mortgage then you would with offset.
Rates:
Another thing to consider is that a lot of the smaller lenders (and even some banks) do not offer best rates on rental properties, so you pay a premium in rates also which diminishes your cash flow. This is another reason why you might want to put down 25% instead of 20%.
Which Lenders to Consider?
While most credit unions how will only finance rental properties with 25% down payment, they are also the ones who are offering HIGH offsets for rental income (70% – 100%) – which means you can qualify for a mortgage a lot easier.
And last but not least, Credit Unions are virtually (at this point in time) the only lenders that will still offer a HELOC (Home Equity Line of Credit) on a rental property. This is important because:
- HELOCs are interest only payments – which means your monthly cash flow is much higher compared to regular mortgage
- If you have a regular mortgage with a combination of HELOC, as your rental property mortgage decreases you can access the equity that has been building up over the years to make another investment – no need to refinance to take out that cash.
Now let’s take a look at Second Home Option:
I’ll mention the disadvantages right way, you will need enough personal income (be it from employment, investment, rental, etc) to carry 2 mortgages, your primary residence and your second home – so this program might not be for everybody.
Down Payment:
This is a HUGE benefit of buying a second home, you can buy with as little as 5% down (with insurance premium added to the mortgage). At 20% all the lenders will finance your purchase as convetional.
Income for Qualification Purposes:
You have to qualify on personal income only, since you are buying a second home (Vacation property, Property for kids while they are in school, or property for parents to live in), this property may not be rented and there for you cannot use rental income for qualification.
Rates:
Again, this is an area where second home purchase has an advantage. Whether you have 5% down or 20% down payment, the lenders will offer you best discounted rates available – there are no premiums that you might see for rental properties and HELOCs are readily available also.
Which Lenders to Consider?
You can consider any lender that suits your financial needs. I would suggest using a lender that will offer you a HELOC with you mortgage, so that you have access to your equity in case you decide you want the cash for another investment, vacation, kid tuition… you get the idea. Of course don’t forget about pre-payment privileges, penalty calculations, and lastly rates – make sure you are choosing the right mortgage and the right lender for your future financial plan.