Understanding The Nuances Of Investment Property Rates
Why Interest Rates are Higher on Investment and Rental Properties
Higher risk is the simplest explanation for why interest rates on investment and rental properties are higher than on owner-occupied properties. The reasoning goes something like this — an owner-occupier will do everything in their power to make timely payments on their home mortgage to protect their source of physical shelter. While investors, too, are emotionally attached to their investment and rental properties, the market perceives that investors are more likely to walk away if a deal turns South. The historical performance data supports the markets perception.
The Math Behind Investment Property Rates
Below, we compare some of the key metrics on a $300,000 30-year mortgage for a consumer and an investor:
In the above example, the investors interest rate is 1.5% or 150 basis points more than the consumer rate. The investors monthly payment will be $1,610, which is $263 or approximately 30% more than the consumers monthly payment. Over the life of the loan, the investor will pay more than 50% more in interest than the consumer.
What Constitutes a Good Investment Property Interest Rate?
*It is also important to note that, unlike owner occupiers, investors care about the cash flow potential of a property. Even with a slightly higher interest rate, good investors are still profiting monthly.
Amortization Periods For Investment Property Mortgages
Your amortization period will depend on how much money you put down on your investment property upfront. For down payments that fall below 20%, youll only be able to qualify for a maximum amortization period of 25 years or less. For down payment over 20%, you may be able to qualify for an amortization period up to 35 years.
The main benefit of a longer amortization period is that it will reduce your monthly payments. That said, lengthening your term for repayment also comes with several drawbacks. These include higher rental property mortgage rates, a higher amount of interest accruing over a longer period of time and more negotiations required for refinancing.
What Drives Calgary’s Mortgage Outlook
Like most housing markets in Alberta, Calgarys mortgage market is heavily influenced by the health of the energy sector, primarily oil and gas. The citys economy is also driven by tourism thanks to its proximity to the Rocky Mountains and its annual Calgary Stampeded rodeo that draws crowds from around the world.
Housing has historically boomed when the oil and gas industry is performing well. But since oil prices plummeted in 2014-15 and 2020, Calgarys housing market has suffered due to rising job losses. Like most other regions, housing and mortgage demand are expected to remain weak into 2021 before starting to recover in 2021 or 2022.
Compared to more rural communities in Alberta, homes in Calgary are easier to sell and have higher prices. Nonetheless, mortgage underwriters often exercise slightly more caution with Calgary deals given ongoing difficulties in the oil and gas sector, which create risk of defaults, home price weakness and higher losses.
Mortgage default rates in the province stood at 0.52% as of January 31, 2020. Again, much of this is due to lost incomes from the struggling oil and gas industry. By comparison, the default rate was just 0.09% in Ontario and 0.15% in British Columbia.
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What Are Investment Property Mortgage Rates
Investment property mortgage rates are the interest rates lenders charge for an investment property loan. The rate youll get is determined by your credit and financial profile, including the size of your down payment. In general, the higher your credit score and the more down payment you can make, the better your rate.
Benefits Vs Risks Of Investment Property Mortgages
There are a number of benefits and risks involved with taking out an investment property mortgage.
- Regular monthly income. If you rent your property out, youll get a regular monthly income or at the very least you can use rental money to pay down your investment property mortgage.
- Potential tax deductions. If your expenses are higher than your rental income, you can deduct your losses to reduce the amount of money you have to pay at tax time.
- Tax benefits. You can also claim costs for managing your investment property on your taxes to get bigger tax breaks.
- Capital gain. Your investment property will likely gain equity over time and you can sell it to get a lump sum of cash if the market has appreciated.
- Flexible asset. You can modify your property to fit your needs. For example, it can be a long-term rental property, a short-term vacation rental or a fixer upper that you sell to get a high short-term return.
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Tax Treatment For Investment Property Mortgages
If you have a rental property, this will show up in a section called Schedule E of your tax returns, which shows all the income and expenses of your rental property.
Expenses include mortgage interest, as well as many other things like property taxes, insurance, HOA dues , maintenance fees, rental management fees, and depreciation.
If the net number on Schedule E is positive, that number counts as income, and youre taxed on it.
If the net number is negative, that number counts as a loss, and reduces your taxable income. But theres a catch here because higher earners dont always get the benefit of reduced taxable income each year. If you make too much, a rental property loss on Schedule E would instead accrue yearly and count as an offset to capital gains when you sell the rental property.
Talk to your tax advisor for advice on which scenario would fit your profile.
What Strategies Can I Use To Make A Profit On My Property
Savvy investors tend to look at multiple property strategies to maximize their wealth creation. These include the following:
- Loss offsetting. If the expenses of an investment property are greater than the income it generates, you may be able to claim a tax deduction to recoup your losses. Talk with an accountant or tax professional to learn more.
- Buy and hold. With this simple strategy, you purchase a property at below-market value and hold onto it with the expectation that the property will grow in value over time. This strategy usually involves buying out owners who can no longer afford their payments.
- Renovate. Often called flipping a house, this technique involves buying a rundown property and renovating it to increase the propertys overall value. This is an approach that requires hard work and money, but gives you the opportunity for bigger gains.
- Passive property development. Passive property investment lets you invest in real estate without being directly involved in it. You simply put in funds to help finance construction. From there, you make automatic returns when the building is rented out.
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What Rates Can You Get On An Investment Loan
As with owner-occupier mortgages, you can choose an investment loan with:
- a variable interest rate, which may rise or fall over time, making your loan repayments cost more or less
- a fixed rate, which lets you enjoy consistent repayments during the fixed rate period, or
- a split rate, where you pay a mix of variable and fixed interest on your mortgage.
Its important to remember that the best investment loan for you may not be the one with the lowest interest rate. If you compare different loan products, you may find a fixed rate home loan or variable rate home loan with features and benefits that offer you extra value, as well as affordable home loan interest rates.
Can I Get An Sba Loan For Rental Property
The SBA 504 loan is the best choice for buying commercial property. Money can be used to buy a building, finance ground-up construction, or rehab an existing building. With the SBA 504 loan, you are likely to have the lowest interest rates and a 25-year repayment term.
Borrowing limits are normally $2 million for commercial property. Key requirements of this loan include the owner must occupy 51% of an existing building or 60% of a new construction building.
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This article is intended to provide general information and shouldn’t be considered legal, tax or financial advice. It’s always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.
A fixed-rate loan of $250,000 for 15 years at 1.875% interest and 2.157% APR will have a monthly payment of $1,594. A fixed-rate loan of $250,000 for 30 years at 2.500% interest and 2.693% APR will have a monthly payment of $987. Taxes and insurance not included therefore, the actual payment obligation will be greater. All loans subject to credit approval. Jumbo Loans: Loan amounts greater than $548,250. In AK and HI, the Conforming loan limit is $822,375. The Jumbo rates quoted above are for loan amounts above $548,250 up to $2,000,000.
Whats The Difference Between Interest Rate And Apr
The interest rate is the percentage that the lender charges for borrowing the money. The APR, or annual percentage rate, is supposed to reflect a more accurate cost of borrowing. The APR calculation includes fees and discount points, along with the interest rate.
A major component of APR is mortgage insurance a policy that protects the lender from losing money if you default on the mortgage. You, the borrower, pay for it.
Lenders usually require mortgage insurance on loans with less than 20% down payment or less than 20% equity .
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Are Florida Mortgage Rates Different By County
No. It would be illegal to discriminate borrowers based on the county they live in. For instance, Miami-Dade county will have the same rate loans as Orange county borrowers. Todays mortgage rates are predominantly based on credit scores, loan amounts, loan-to-value based on amount of down-payment, loan type such as conventional mortgage versus FHA loans, occupancy type such as investment property versus owner occupied and type of property such as single family home or a condo. Mortgage lenders that offer higher mortgage rates than others are purely based on profit margins and not county.
What Should I Know Before I Apply
To apply for an investment property mortgage, you need to meet the following criteria:
- Be at least 18 years old
- Be a citizen or resident of Canada
- Be free from bankruptcy or other forms of unmanageable debt
You may need to provide a number of documents to qualify for an investment property mortgage. These can include the following:
- Proof of income. Youll be required to submit documents like pay stubs and letters of employment to verify how much money you make.
- Proof of down payment. Youll usually have to show that you have enough money in the bank to cover your down payments .
- You may need to authorize your broker or the bank to pull your credit report so that they can assess your creditworthiness.
- Government-issued ID. Youll have to show proof of ID like your drivers licence or passport to start the application process.
- Property documentation. You may be required to show property listings and zoning documentation for the property you want to buy.
- Other financial information. You could be required to provide a list of your debts and assets so that your lender can calculate your debt ratio.
How do lenders assess your financial eligibility?
There are 3 main debt ratio calculations a lender might use to figure out if youre eligible for a mortgage, and what your investment property mortgage rates should be.
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Lower Your Monthly Payment
Refinancing to a longer-term mortgage can be another way to lower your monthly payment. If you only have 15 years left on your loan, for example, and then you refinance into a new 30-year loan, your balance is then spread out over many more years and months, thus lowering your payment. Keep in mind though that a longer term means you may pay more interest over the life of the loan.
How To Prepare Yourself To Get The Best Mortgage Rate On A Home Loan
Since credit score is the most important factor in determining your mortgage rate, be sure to have your credit card balances down to no more that 35% of your credit limit at least 30 days prior to applying for a home loan. It also helps to obtain a personal copy of your credit report from all three credit bureaus to ensure that there are no errors on your credit report such as collection accounts. As long as your credit score is over 740, you are good to go since lenders typically offer the same rate to borrowers with credit score of 740 plus.
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How Do I Compare Investment And Rental Property Mortgage Rates
The only way to find the lender with the most competitive investment or rental property mortgage rate is to compare multiple lenders, and then compare their rates and fees. Within days of being preapproved, youll receive a Loan Estimate from each lender. These let you compare every aspect of the loan side by side, so you can see the total cost including the investment property mortgage rate, origination fee, closing costs and more.
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Anz Fixed Residential Investment Loan
- Your interest rate won’t change during the fixed period
- Choose from 1, 2, 3, 4, 5, 7 and 10 year fixed rate termsdisclaimer
Principal and interest rate under the ANZ Breakfree package
Annual package fee currently $395. Terms and conditions, minimum lending requirements and eligibility criteria apply.disclaimer See all the rates available for this home loan type.
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Buying A Second Home To Rent
Buying a second home that will be used as a rental property comes with a number of advantages, most notable of which are the tax deductions. But on the flip side, it also means that a buyer will become a landlord and have certain responsibilities that will require time and energy. It is one thing having a second home that you only visit for yearly vacations, and it is an entirely different thing to have a second home that will be rented out.
As far as tax deductions are concerned, there are two conditions under which a property will be considered a second home. They are:
An example of these conditions being met is a second home that you rent out for 200 days in a year and live in for at least 20 days in the year. Meeting these conditions ensures that the house qualifies for a second home mortgage.
Considering that second home mortgages are usually easier to qualify for than investment property mortgages and come with lower interest, it is important for you to carefully evaluate all the criteria involved in meeting them.
Ready to buy a second home? Or maybe you want to purchase an investment property. You need to know the difference between the two, because getting a mortgage loan for one is usually a more complicated and costly process.
Should You Refinance Your Mortgage When Interest Rates Drop
Determining whether its the right time to refinance your home loan or not involves a number of factors. Most experts agree you should consider a mortgage refinancing if your current mortgage rate exceeds todays mortgage rates by 0.75 percentage points. Some say a refi can make sense if you can reduce your mortgage rate by as little as 0.5 percentage point . It doesnt make sense to refinance every time rates decline a little bit because mortgage fees would cut into your savings.
Many of the best mortgage refinance lenders can give you free rate quotes to help you decide whether the money youd save in interest justifies the cost of a new loan. Try to get a quote with a soft credit check which wont hurt your credit score.
You could increase interest savings by going with a shorter loan term such as a 15-year mortgage. Your payments will be higher, but you could save on interest charges over time, and youd pay off your house sooner.
How much does the interest rate affect mortgage payments?
In general, the lower the interest rate the lower your monthly payments will be. For example:
- If you have a $300,000 fixed-rate 30-year mortgage at 4% interest, your monthly payment will be $1,432 . Youll pay a total of $215,608 in interest over the full loan term.
- The same-sized loan at 3% interest will have a monthly payment of $1,264. You will pay a total of $155,040 in interest a savings of over $60,000.
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Owner Occupier Vs Investment Loans
Most mortgage lenders consider owner-occupier home loans to be less financially risky than investment mortgages. After all, an owner occupier has a vested interest in keeping up with their principal and interest repayments in order to keep a roof over their head, and to make progress towards owning their home outright. This means that lenders tend to offer lower interest rates and lower fees to owner occupiers.
Investors use the properties they buy as assets to generate wealth, either through rental yields or capital gains. However, its not guaranteed that a property will increase in value, or that tenants will always be available to pay rent, so an investor may not always make money from their investment. Additionally, investors may choose to minimise the mortgage repayments on their investment property in order to enjoy tax benefits, such as negative gearing. Thus, lenders often charge investors higher interest rates to help make up for the higher risk of potentially defaulting on their mortgage repayments.
However, investor mortgage offers are more likely to offer flexible features that could better suit investment properties. For example, an investment mortgage is more likely to offer flexible repayment options that could help allow investors to better manage the rental yields from their investment property.