Getting A Bigger Mortgage Loan on Your Rental Properties
By: David Grossman Mortgage Agent / Lic# M08005924
“Alternative lenders use what they call “rental offset” in calculating the maximum allowable mortgage, the end result is we (mortgage brokers) are usually able to get people a lot more money.”
I was recently approached by a couple who felt so good about the purchase they made on their family home ten years earlier, they now felt ready to buy an investment condo. They had steady jobs and recently inherited $200,000. The plan was to use the inheritance towards the down payment.
The purchase price of the condo they wanted to buy was $400,000, projected rental income $1,800 monthly, combined maintenance and property taxes $650 per month.
They asked me for help with their financing options.
Where investment properties are concerned, banks usually take 50% of the rental income from an investment property and add that to your other income to calculate your maximum mortgage. Even with $1,800 per month in rental income from the condo, the maximum the couple would qualify for at the bank was just $100,000. Getting the mortgage at the bank was not an option since the couple only had $200,000 to put down and the purchase price was $400,000.
“We were able to get the borrowers a $300,000 mortgage vs the bank who were only willing to loan $100,000”
Mortgage brokers often work with alternative lenders that charge a slight premium over bank rates, but the lending rules are very different than banks. Rates with alternative lenders start in the 4% range compared with around 3.5% at the bank. Alternative lenders use what they call “rental offset” in calculating the maximum allowable mortgage. They use a portion of the rental income — usually 80% — to effectively “cancel out” expenses like mortgage, maintenance and taxes, and the borrower needs only to be able to cover the difference. The end result is that mortgage brokers are usually able to get people a lot more money. In the above noted example we were able to get the borrowers a $300,000 mortgage vs the bank who were only willing to loan $100,000. In the end, we did arrange the mortgage for the purchasers with one of our alternative lenders and the couple decided to take the extra $100,000 we saved them and use it to top up their RRSPs!