The Evolution of Rental Financing

Rental-Financing (2)Ever since the credit crisis, there’s been an ongoing clampdown on mortgage risk. Nowhere is that more evident than with rental and self-employed mortgages.

This week’s Globe column looks at rental financing—and what makes it more challenging today than, say, four years ago.

If you’re a well-qualified borrower and you only own a few properties, this isn’t a major concern. But when you have a larger rental portfolio or need flexibility with your application, it’s a different story.

When researching for this article, I ran through a bunch of rental scenarios with Rick Robertson over at Mortgage Mentor. It was instructive to see just how fast lender options shrink when you need one that allows:

  • Flexible income treatment
    (e.g., 80% rental offset)
  • Corporate borrowers
    (i.e., rentals in a company name)
  • Secondary financing
  • and so on…

There’s so much talk about how mortgages are becoming commoditized. Well, rental financing is one realm of the mortgage world that’s anything but.

It’s an area where knowing your lenders is everything, and where an experienced mortgage professional always adds value.

More: Buying a rental property? How the financing game has changed


Rob McLister, CMT

  1. It’s amazing how many believe that just because you own 10 rental properties, it’s easier to get a mortgage on another one; whereas in reality, those 10 make it so much harder. Thanks for the post, I’ve had limited access since they’ve started charging subscription prices.

  2. You would think that banks would see that an investor paying 10 mortgages off diligently over decades, that it would be more willing to lend to them. ;) Its all in your perspective.
    The broker channel seems to has lost its ability to put deals through to the Scotiabank once you hit a rental portfolio of a certain size. But local Scotia branches still have the ability to work with investors with large portfolios. They also still use 70% rental offset, and 80% LTV. Which gives you better options than most that are out there.

  3. “They” say that it’s riskier to lend in this area and that the rate of default is higher. I’ve never seen actual numbers on this from anywhere/anyone.
    I find it hard to believe that someone with a proven track record and at least an 80% LTV over a large portfolio of properties is riskier than the first time home buyer using gifted money at a 95% LTV.
    Does anyone have actual numbers?

  4. Thanks Rob for a great article. I have been brokering for over 20 years and one of the challenges is to convince those rental property investors that we need to provide more documentation and it may not be approved.
    The consumer usually finds out when it is to late!

  5. Its easy to believe. The difference is the CMHC guarantee that comes with the first time home buyer.
    The reality is any insured mortgage is more desirable to the F.I. since it’s easier to securitize/capitalize and they don’t have to carry a default provision on the books.

  6. I have a portfolio of 15 large units over 4 buildings.
    I have had limited problems obtaining financing for the 4th building (just before the 20% rule for rentals came in). However, I have never had any problems refinancing buildings, including this year. That’s including taking money out to 80% LTV. I have dealt with RBC, NB, Desjardins, Firstline and Scotiabank.
    In terms of unit/building caps, I know that Desjardins has a 12 door/unit limit, with Desjardins specifically, not in general. After that point you have to deal with the central commercial lending department, not the local branches. Thing is, the commercial lending department at Desjardins has the same rates and conditions as the branches, but doesn’t use brokers, not even the internal brokers. You have to take the initiative to apply to the commercial department yourself. Desjardins is very pro-real estate and will allow you to withdraw equity as often as you like (min 10000$ at a time).
    If you would ave asked me 3 years ago, I would have argued against 50% rental offset, in favour of 80%+. Now I would say that 50% sounds fair for a large portfolio, especially as A) the percentage of personal employment income becomes smaller in relation to the portfolio and B) a lot of investors properties are not cash flow neutral or positive if financed to a level only made possible by 50% offset. As my portfolio has gotten bigger, I have become more conservative. All that means, is that I may not be adding as quickly to my portfolio in terms of units/buildings, but my LTV, Cap rate, cash flow, etc are all very strong.
    Also, as the # of my buildings increases, rather than refinancing to buy another building of similar size, I plan on refinancing several buildings and buying larger rental properties (6+ units per building). In that case the CMHC minimum down payment is actually only 15% (other criteria do get more conservative), and doesn’t take into personal employment income. Over 6 units is treated as a business, and is often far out of financial reach of investors only capable of putting 20% down on a single condo. But the cap rates are usually significantly better. In my case, I built my foundation with smaller buildings, and through refinancing am adding larger buildings. Simply adapting to the rules as they change.

  7. Good tip about Desjardin. That is one lender I haven’t tried yet. I’m finding it almost impossible to get refinances done on a 11 unit portfolio. The TDS is above limit at every lender I go to even though the properties cash flow easily.

  8. I thought that TDS for non-owner occupied properties used the Net income for those properties (and so then excludes PITH as its part of the net calculation).
    If your properties are cash flow positive, then they would be adding to your income, lowering the TDS. Unless your other income is very low, or currently have none.
    Where would the problem be? I’m very interested, as banks have never actually shown me their calculations.

  9. Canre
    MANY lenders have reverted back to the old (5 years ago old), and backward method of NOT treating the rental as a stand alone. (not for those with multiple properties ie we are talking about someone with 2 or 3, for example) Rather, the lender recognizes 50% of the rental, and THEN adds it to your personal income (not deducting it from the rental expenses) and THEN takes 30% gds/ 4? % tds to qualify that mortgage and ALL other mtges you have. This means that $1,000 of rental becomes $ 150 – to $ 200 ( 50% of 1000 X 30% or 40%) worth of monies to support your new rental mtge. It does make sense NOT to use a 100% of the rent to offset the expenses. even reducing the percentage from 80% down to 50% of the rent to OFFSET the expenses is conservative while still allowing someone with more than one mtge to fit the rules.
    The above suggestions to use a specialist, if you are not getting good results, is smart advice

  10. What do you mean “not for those with multiple properties ie we are talking about 2 or 3? Isn’t 2 or 3 properties multiple properties? I am confused by the distinction.

  11. reply to canre
    Multiple units- Many lenders tend to deem those financing 5 or more ( ie a 6 plex or 10 plex) as business or commercial financing and treat them differently – as stand alone – rather than the financing of 1 to 4 units
    Multiple properties – These same lenders also tend to treat those owning 2 to 3 (other) rental properties under their “add on” income approach, making it very difficult to finance a property, if you have a second or 3rd property that you own. Having said that, there are many lenders, as was referenced in the discussion above, that finance rentals on a stand alone basis (with differing rules for percentages etc)and they will treat the rental, whether you are financing one unit, or whether you own 10 properties, in the same manner using offset, or rental coverage rules, rather than add on. From a risk point of view, some lenders may have a maximum number of properties, (or dollars in mortgage amount), that they would lend to one person; meaning if you had 10 properties, financed amount several lenders, that may not be an issue vs all 10 being financed by one lender. Again,in rental financing, the rule differences can be subtle or massive as to final approval terms. If you are getting satisfaction from your existing lender, then there is no issue. If not, then using an advisor to assist you in rental property finance negotiations is more practical than perhaps when you are looking for a straight forward res, owner occupied mortgage approval

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