As mortgage brokers specializing in income property financing, we receive hundreds of questions from investors across the country in regards to various aspects relating to financing income properties.
In this series, we answer the common questions we come across:
Generally, financing starts to get trickier for investors with the five big banks as investors grow their portfolio and in particular as they start to grow beyond the 5th rental property.
All lenders have a “limit “on the number of rentals they would finance for a client and for the rental portfolio holdings they would allow through the door. That is the first filter they look at before assessing whether or not a client qualifies for a mortgage with them based on credit, income, debts and the type of property financed.
Most banks have a limit of 5 rentals for the portfolio size (regardless of whether or not it is financed with them). Some may go to 6 with an exception. Very few would go to 9 or 10 but they demand more in terms of net worth and/or down payment as the portfolio risk increases.
Then you have lenders such as alternative lenders who would work with investors with large portfolios (beyond the 9 or 10) but would limit how much they lend per client either by dollar amount or number of properties (often 4 – 5 with them) and would charge a premium in rates to compensate for the risk.
If your bank said “No” to financing your deal or said that you have maxed out (i.e. hit the financing wall with them), I have good news for you. You have options and here is why:
- Every lender is different
As much as you may think that all lenders run the numbers the same way to qualify your refinance or purchase. They do not. For example: some lenders use a larger percentage of the rental income than others. In addition, if you have a revolving line of credit: some lenders take an interest only payment, while others take a much larger payment into consideration (at the Bank of Canada rate ~5%) than what you are actually paying in interest. This means that if your deal does not work with one lender and that they tell you that you have maxed out, then it is time to speak with an investment property mortgage broker who knows the rules on the street inside out to give you a second opinion. I assure you that there are options that you have not considered that will open up approvals for you. So do not assume that your bank’s “No” is everyone else’s “No”.
- Restructuring can open up possibilities
If you have gone through the financing of your property portfolio one property at a time without assessing the impact of today’s financing on tomorrow’s financing, then you may have unintentionally structured financing in a way that ate up quickly into your borrowing power. To mention a few of those un-intended structuring mistakes: taking 25 year amortization mortgages because the rates may have been lower, adding others on title and therefore reducing the percentage of rental income lenders are taking into consideration and keeping large revolving lines of credit as interest only lines (while you are paying interest, lenders are taking a much larger payment into consideration). By having an experienced investment property financing mortgage broker give you a second opinion, he/she may uncover simple restructuring opportunities that can pave the way for more financing.
To avoid hitting the financing walls with lenders, consider what we call “planning financing”.
Planning financing goes beyond getting a “pre-approval” or a quote on what you qualify for next along with the mortgage terms. It entails speaking with a qualified investment property mortgage broker to take a 1000 level view of your portfolio and plans beyond the transaction at hand or the next deal and helping you proactively plan the steps needed to keep your borrowing power at best and keeping capital flowing into your hands for future investments. Planning involves looking at the following components and mapping out financing for the next 3- 5 deals not just the next one. This includes planning your sources of income and how you report that income (this is particularly important for self-employed clients). It also involves planning the source of the down payment and capital to grow including where the money is coming from, how to go about extracting any equity from your properties to grow and how to support the down payment requirements for lenders, when to put a property in your personal name versus in a corporation, the parties that will go on the deal and impact on your borrowing power, proactively managing your credit to meet the lenders requirements and the impact of the investment strategy you are using on the financing terms you will get.
As qualified mortgage brokers specializing in income property financing and in self-employed mortgages, Streetwise Mortgages can help you plan financing to avoid hitting the financing wall and can give you a second opinion regarding your options if your bank has said “No.”
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.
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