Investors’ Top Income Property Financing Questions – Part 1: commercial vs residential

As mortgage brokers specializing in income property financing, we receive hundreds of questions from investors across the country regarding various aspects relating to financing income properties.

In this series, we answer the common questions we come across.

QUESTION 1: what are the key differences between financing commercial and multi residential properties (5 units or more); and residential properties with 1 – 4 units?

The key difference between commercial and residential financing is who qualifies for the mortgage. If you are buying a dwelling with 1, 2, 3 or 4 units, the lenders require you to personally qualify for the mortgage based on your income, debt load and credit.

When purchasing a dwelling that has a commercial component or is all residential with 5 units or more, it is the property that qualifies for the mortgage based on its Net Operating Income, not you personally, which means that you can purchase a commercial / multi residential property even if you do not currently work or report any income at the personal level!

Having said that, there are a few caveats:

5 and 6 unit multi residential properties fall in the “grey” zone for a few lenders, where they can be financed under the residential guidelines offering clients better financing terms than those offered under the commercial rules, such as 20% down, 30-year amortization option, low rates and low cost of acquisition (i. e. no need for environmental or commercial appraisals).

Also, some lenders offer the option to finance a purely residential property (1 – 4 units) under the commercial guidelines by looking primarily at how much mortgage that property can carry based on its Net Operating Income. This method may work better for some investors who are buying/own legal duplex, Triplex or Four plexes and no longer qualify under the traditional residential financing rules.

Another key difference between the residential and commercial financing are the financing terms offered and the costs associated with arranging financing.

Under the residential guidelines:

1. The minimum down payment is 20% assuming the borrower qualifies
2. The amortization can extend to 30 years
3. Institutional lenders do not charge a fee, unless the deal is financed with a “B” lender
4. Appraisal fees are low
5. No environmental assessment is needed

Under the commercial guidelines:

1. The minimum down payment is determined by how much mortgage the property qualifies for based on its Net Operating Income (NOI). For example: if the property qualifies for a 75% loan to value loan, the down payment would be 25% down.  If the NOI warrants a higher mortgage amount (above the 75% mark), the property must be financed through CMHC and the down payment can be as low as 15% of the value of the property ( as determined by CMHC)
2. On non-CMHC deals: the maximum amortization is 25 years. On CMHC deals, longer amortization options are offered such as: 30 , 35 and 40 years as long as the property’s economic life is greater than the amortization.
3. Both lenders and brokers charge a fee as a percentage of the loan amount.  The fees vary from deal to deal depending on the size of the loan
4. Appraisals must be done by an AACI certified appraiser and cost at least a $1000 dollars. The larger the asset ( i. e the more units), the higher the cost

As mortgage brokers specializing in income property financing, Streetwise Mortgages can help you design an optimal financing road map for your properties and given your investment goals.

Dalia Barsoum is president and principal broker at Streetwise Mortgages and a regular columnist for Canadian Real Estate Wealth. She leads an award-winning team of mortgage advisors offering strategic income property and portfolio advice to Real Estate investors across Ontario.

Click here to set up a complimentary planning session with Dalia or Streetwise Mortgage Advisor.