Bringing back 35-year amortization

By Dalia Barsoum

Amortization is of high importance to investors because of its direct impact on whether or not an income property cash flows. Four years ago, the maximum amortization on insured mortgages was reduced from 35 years to 30 years, and then was lowered again, to 25 years, in June 2012.

So what is the typical amortization on rental properties? For this question, I’m referring to residential income-producing properties, including: single-family homes, as well as legal duplexes, triplexes and four-plexes. Some lenders also offer 30-year amortizations on five and six-plexes if these properties are approved under that lender’s residential versus commercial lending guidelines.

The answer is: 30 years with most lenders, 25 years with some and 35 years with very few. That’s right: 35 years on rental properties still exists, despite the changes to amortization over the years.

Whether or not your deal qualifies for 35, 30 or 25-year amortization will depend on several factors.
  1. The number of properties in your portfolio.
If you’re financing your fifth property, your deal will not qualify for a 35-year amortization.
  1. How the numbers work.
For a deal to be approved, the lending ratios (gross and total debt coverage) have to fit the lender’s guidelines. As much as you may want an extended amortization for your deal, the numbers have to work for the lenders that offer it. If they don’t, you may be forced to take your deal to a lender that only offers shorter amortization on rental properties.
  1. Whether or not you are willing to increase your down payment and/or if you are comfortable with insurance premiums.
Assuming you have not reached your fifth property and the numbers work for the lenders that offer a 35-year amortization, you will be required to either inject 25 per cent into the deal or stick with a 20 per cent down with the lender adding an insurance premium to the mortgage. Some lenders allow portions of the down payment to be borrowed or gifted; with these, you don’t really need to come up with the extra funds from your own pocket.
  1. The condition of the property you are buying.
If you are purchasing a run-down property, lenders may not be willing to offer the extended amortization program. Having said that, you can improve its condition and then take it back for approval under the 35-year amortization program.

Amortization will definitely influence your cash flow, but it’s a small piece of the financing formula. While many may prefer a longer amortization for rental properties, it’s important to consider other financing variables when approving a deal, such as: the long-term implication to your overall plans/portfolio financing and or property exit strategy, the interest rate, any insurance premiums that are added, and any costs (lender and/or broker) associated with financing.

Dalia Barsoum, MBA and Fellow Institute of the Canadian Bankers Association, is the best-selling author of 'Canadian Real Estate Investor Financing  7 Secrets to Getting All The Money You Want'. Contact her via her Canada-wide, investor-centred lending practice, StreetwiseMortgages.com or via CanadianInvestorFinancing.com.
 

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