By Dalia Barsoum
With the recent unexpected reduction in Bank of Canada’s overnight lending rates, we are getting tons of inquiries from investors regarding how the lenders’ rates are impacted and where the best rates for investment properties can be found.
While many lenders are starting to incorporate the Bank of Canada rate reduction into their offerings to consumers (which is great news), I would like to emphasize the importance of looking at rates as secondary to the approval compared to the primary reason why you should get your deal approved with a particular lender.
Let me demonstrate through the story of Megan, one of our successful investors, who was looking to refinance one of her properties to purchase another investment. A few years back, she went straight to her bank and locked into the lowest five-year fixed mortgage product available on the market. Unfortunately, blinded by the low rate, she did not pay much attention to the fine print that indicated the mortgage was completely closed for the full-term and that it could not be refinanced. Megan’s only options for equity was to find a lender that would approve her for a secured line of credit – in second position – or obtain private funding.
While mortgage rates are a very important variable in the financing formula, they should be secondary to obtaining the right mortgage product that aligns to your investment strategy. For example:
As a rent-to-own investor, you need to focus more on matching the mortgage term to the lease option term and/or going with a variable-rate option. This way, you avoid any hefty penalties that may arise at the time of sale to the tenant-buyer, perhaps from breaking a mortgage term before its maturity.
- Renovate and flip
If you plan to renovate run-down properties and flip them over a short-time period for profit it is important to keep your options open to avoid any large mortgage penalties at the time of sale. Going with an open mortgage for this particular strategy works best.
- Renovate and refinance
This strategy is similar to #2 but you would be looking to refinance the property – a few months after the renovations are complete – to re-invest again, while renting the current property. With this strategy, you need to focus on keeping your options opened in anticipation of a refinance (ie. going with an open-rate mortgage, variable rate or a line of credit, or going with a short-term fixed mortgage of one year or less).
- Buy and hold
An ideal product for investors who purchase under this strategy is a re-advanceable mortgage product because this product allows the investor to tap into equity in a very efficient manner without having to go through the hassles of approvals and appraisals. As investors pay down the principal on the mortgage, they get access to any paid-down principal in the form of a secured line of credit.
Simply put, investors should follow these steps:
1. Determine your investment strategy.
2. Decide which product suits that strategy.
3. Work with the lenders where your deal will get approved (given your credit, finances and property characteristics) and where the desired product is offered.
4. Then, negotiate the best rate with that lender.
5. Remember to always “Begin with the End in Mind", as advised by Stephen Covey in The 7 Habits of Highly Effective People
Dalia Barsoum, MBA and Fellow Institute of the Canadian Bankers Association, is the bestselling author of Canadian Real Estate Investor Financing: 7 Secrets to Getting All The Money You Want. Her Canada-wide investor-centred lending practice (www.StreetwiseMortgages.com and www.CanadianInvestorFinancing.com) aims to help investors develop and implement a financing strategy to grow their wealth in real estate.
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