Help aspiring and current property investors learn about investment property mortgage rates. Learn how these rates work and how homebuyers can navigate them
For clients who are financially ready, investing in real estate can offer long-term benefits. These include steady rental income and capital appreciation. But for those whose finances aren’t as solid, property investment can lead to costly mistakes.
That’s why it’s a must for financial advisors to help clients understand how investment property mortgages work before they make any big decisions. In this article, Wealth Professional Canada will explore what you need to know about investment property mortgage rates. We’ll share valuable insights so you can better guide your clients who are building wealth through real estate.
What are investment property mortgage rates?
Buying a property for investment purposes is not the same as buying a home to live in. It’s for the purpose of generating rental income or holding for sustained growth. In Canada, mortgage rates for investment properties are usually higher than rates for primary residences. This also means borrowers face tougher qualification requirements.
Investment property mortgage rates refer to the interest charged on loans used to buy or refinance properties that aren’t used as a principal residence. Here are some examples:
- rental homes
- vacation homes
- multi-unit buildings
Bank and mortgage lenders in Canada also tend to require larger down payments. They would mostly ask 20 percent from your clients or more. They’ll also ask for stronger borrower profiles.
For financial advisors, it’s beneficial to learn how these mortgage rates work so you can guide your clients toward suitable financing options. You’ll also be able to help manage expectations around cost, cash flow, and risk.
More risk for investment properties
Investment property mortgage rates are higher because banks and mortgage lenders take on more risk when working with real estate investors. These mortgages are not backed by owner-occupancy, and that lack of personal use increases the likelihood of repayment issues. To compensate, mortgage lenders charge higher interest rates and apply more rigorous lending standards.
For clients who plan to rent out their investment properties, periods of vacancy are a real possibility. These can disrupt expected cash flow. If the property isn’t generating income, it becomes harder for some investors to keep up with mortgage payments, especially if they don’t have reserves.
In financially tight situations, many borrowers will prioritize their primary residence. That increases the chance they’ll fall behind or even default on their investment property mortgage.
Understanding these risks helps you assess your clients’ financial readiness. You’ll also be certain that they’re not overextending themselves with a property purchase that could strain their wealth-building strategy.
Learn more about the risks of buying investment property by watching this video:
Do you wish to see your name along with the top financial advisors in the country? Being knowledgeable about investment property mortgage rates can prove to be an advantage—especially if you have clients who are into real estate investing.
Reasons why investing in property is worth it
There are several reasons why investing in property can be a smart move for your clients. Real estate can offer both income and long-term value, depending on how the property is used. Some common goals include:
- buy a home for an elderly parent to live in and enjoy the appreciation when it’s sold
- purchase and hold the land for future development
- generate passive income by securing renters
- flip the property for profit
Whatever the reason, investing in property can give your clients a reliable way to build wealth outside of traditional investments.
As their trusted financial advisor, your role is to evaluate whether the investment supports their income needs, risk tolerance, and timeline. If the property aligns with their financial plan, it can offer both stability and upside potential even in an economy where living costs are surging.
Factors that affect investment property mortgage rates
Here are some of the factors that can influence investment property mortgage rates:
- credit score
- down payment
- DTI ratio
- property type
- market conditions
Below is a closer look at these six factors:
1. Credit score
Your clients’ credit score can have a huge impact on the rate they get on an investment property mortgage. Banks and mortgage lenders look at credit scores to measure how likely a borrower is to repay the loan.
Higher credit scores can signal that your clients have a good history of paying debts on time. This makes them a lower risk to the mortgage lender.
Lower risk often means lower rates. On the other hand, if your clients have low credit scores, mortgage lenders may offer a higher rate to cover the extra risk.
2. Down payment
The size of the down payment can also affect the mortgage rate your clients receive. Mortgage lenders see bigger down payments as a sign of lower risk. A larger down payment means your clients are borrowing less and have more of their own money invested in the property.
This lowers the mortgage providers’ risk of loss if your clients stop making payments. Others would offer lower rates if your clients can put at least 20 percent down. The larger the down payment, the better the chance of getting a lower mortgage rate.
Help your clients prepare for their down payment before they start their homebuying journey. Share useful tips on saving and spending wisely.
3. DTI ratio
The debt-to-income ratio (DTI) is another factor that mortgage lenders review. DTI compares your clients’ monthly debt payments to their monthly income. A lower DTI shows banks and mortgage lenders that your clients have room in their budget to take on another loan. It also means they’re more likely to afford both their current debts and the investment property mortgage.
A high DTI suggests a higher risk of missed payments. Most mortgage lenders prefer a DTI below 35 percent. Helping your clients lower their DTI before applying can improve their chances of being approved for a mortgage.
You can add value by helping your clients reduce their DTI before they apply. Paying down debt or increasing income can improve their financial profile. This can also boost their chances of qualifying for better rates on an investment property mortgage.
Learn more about DTI ratios when you watch this:
4. Property type
The type of property your clients want to buy will also impact their mortgage rate. Single-family homes usually have lower rates compared to multi-unit or mixed-use properties. Mortgage lenders see multi-unit properties as riskier because these depend on multiple tenants to generate income.
If the property is vacant or if tenants aren’t paying rent, your clients might struggle to make payments. Mixed-use properties add more risk because they combine residential and commercial space. Be sure to explain these differences to your clients when they compare investment property options.
A property with higher risk might still be a good investment. However, your clients should be prepared for how that risk can affect loan terms, financing options, and cash flow.
5. Market conditions
Mortgage rates don’t stay the same. They move up and down based on economic conditions. In Canada, banks and mortgage lenders adjust interest rates depending on factors like the cost of borrowing and inflation.
During high inflation, investment property mortgage rates often increase. Mortgage providers raise rates to protect against the declining value of money over time. When inflation is lower, mortgage rates may come down, making it cheaper to borrow.
Another important factor in Canada is the Bank of Canada’s policy interest rate. When the Bank of Canada changes this rate as part of its monetary policy, it influences the rates that mortgage lenders charge for mortgages and other loans.
Even though your clients cannot control these market shifts, it pays to stay updated. Tracking interest rate trends can help you advise your clients on timing their investment property purchases more effectively.
Benefits and downsides of investment properties
At first glance, it would certainly seem like investment properties are worth it. But as with any major decision in real estate, it's beneficial to weigh the pros and cons.
Advantages of investment properties
Let’s take a quick look at the pros of investment properties:
- security and stability
- cash flow
- tax benefits
- long-term investment
Here is a closer look at each of these benefits:
1. Security and stability
Properties are in demand, since everyone needs a place to live. While the housing market is notorious for its fluctuations, it's less affected by market changes and is likely to provide fixed returns. Compared to other types of investments, real estate is more secure and stable.
2. Cash flow
There is a high demand for housing, which means that an investment property will provide your clients with a steady stream of passive income. This is guaranteed if their rental income is higher than their monthly repayments and maintenance costs. They can even use this income to repay the mortgage rates for their investment property.
3. Tax benefits
They may also enjoy tax deductions that allow them to maximize their tax return on investments. Any expense that they incur in the day-to-day operation of their rental property should be claimed against their income. This will then reduce their tax over time.
4. Long-term investment
In the long run, the value of their real estate investments should increase. The same is true for their rental income if their property is in a high-yield area. Their cash flow should also increase. In turn, you can advise your clients to use these additional funds to expand their investment portfolio.
Disadvantages of investment properties
While there are obvious upsides to investment properties, there are also some disadvantages:
- liquidity issues
- entry costs
- ongoing costs
- difficult tenants
Here is an in-depth look at each:
1. Liquidity issues
Your clients will likely have a difficult time accessing cash if they invest in property versus when they invest in stocks. After all, it takes more time to sell a house. If they have an immediate need for cash, like an emergency, they’ll have a tougher time cashing in on their investment.
2. Entry costs
The heavy financing required is one of the biggest challenges for anyone who wants to get into the investment property game. The deposit alone can cost a lot of money. After paying the entry costs, your clients will also need to prepare for the expensive investment property mortgage rates.
3. Ongoing costs
Because of the high costs involved, investing in real estate requires a lot of planning. Aside from the investment property mortgage rates, owning a property will cost your clients these charges over time:
- council rates
- maintenance fees
- home renovation costs
In turn, you must help your clients refine their investment strategy to generate more income from their property than all their ongoing costs combined.
4. Difficult tenants
If your clients have difficult tenants, it can be a nightmare. They can cause emotional stress, and their actions may even lead to financial losses. This is particularly true if their tenants don't pay rent or cause damage to the property.
If your clients don’t want to deal with the possibility of having difficult clients, advise them to diversify their portfolio. For instance, they might want to try investing in REITs instead.
What is the typical down payment on an investment property?
The typical down payment on an investment property is between 20 and 25 percent. However, it can also be common for banks and mortgage lenders to require a higher down payment.
The typical down payment on an investment property depends on these factors:
- lender’s requirements
- borrower’s experience
- general risk profile
- credit history
The potential level of risk for the bank or mortgage lender increases if the borrower makes a smaller down payment, which increases the loan-to-value (LTV) ratio. In other words, the borrower might be more willing to walk away from the investment if it underperforms.
To compensate the mortgage lender for taking more risk, investment property loans with a higher LTV ratio usually come with higher interest rates and larger loan fees.
How to maximize investment property mortgage rates
As you already know, investment property mortgage rates are usually higher than mortgage rates for primary residences. However, if your clients’ finances are in order, they can enjoy the long-term rewards. It’s vital that you help them weigh the risks and guide them on improving their strategies.
Finally, remember that your advice matters even when your clients are big-time property investors. So, make sure that you can explain the available property loan options and factors that affect investment property mortgage rates. By doing so, your clients can get the most out of their investment.
Looking for extra guidance? Visit Wealth Professional’s Investments section for expert resources, tips, and industry updates.
