Can I Get A Second Mortgage On My Rental Property
Yes, getting a 2nd mortgage for an investment property youve already secured a buy-to-let mortgage against is possible, as long as you hold enough equity in the property and the lender is convinced your rental income is high enough to cover both debts secured on the BTL.
This is known as a second charge buy-to-let mortgage and the debt youd take on would sit behind any mortgages you already have on the property. This means that the second charge mortgage lender would be second in line for any proceeds that come from a sale of the property, in the event that it has to be repossessed and offloaded to clear the outstanding debts.
Investment Property Mortgages Guide
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Author:Pete Mugleston– Mortgage Advisor, MD
Investment property mortgages are a very broad product category that includes everything from buy-to-let loans to commercial mortgages. And if youre thinking of applying for one or simply want more information about this type of finance, youve come to the right place.
In our guide to investment property mortgages, youll learn exactly what type of finance falls into this category, how to get an investment mortgage, what kind of rates to expect and where to turn for the right advice.
Plus in our FAQ section, we field the questions we hear most often from customers who are looking for finance to buy a property for investment purposes.
The following topics are covered below…
Wowa Tip: Should You Pay Off The Rental Property Mortgage
If your property generates cash flow – meaning profits, you should keep your mortgage. However, paying off the mortgage could be a good idea if your property is losing money. In general, mortgage debt enhances your return on investment because you only need a small down payment to receive the total property appreciation and rental income. There are also the tax benefits of mortgage debt, such as deductions.
If your property generates profits, your money would be better spent as a down payment for another rental property. Instead of one fully paid off property, you could have two that appreciate in value and still provide you with rental income.
Each year, you will receive a T5013 slip from your mortgage lender showing the amount of interest paid. You must fill outLine 8710with the appropriate amount to claim the mortgage interest payments. Additionally, you may claim the costs directly associated with receiving the mortgage, such as:
- Legal fees
- Mortgage broker fees
- Application & processing fees
With the deduction, you will lower the total amount of tax you need to pay. Some otherpopular rental expenses you can deduct in Canadainclude:
- And more
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Where To Find Rental Property
- Roofstock Marketplace is used by remote real estate investors to buy and sell single-family rentals, multifamily buildings, large portfolios of rental property and, through Roofstock One, accredited investors can purchase .
- Zillow, Realtor.com, and HomePath.com are three online websites for finding homes for sale by owner, real estate agent listings, and homes in foreclosure.
- Multi-Listing Services are used by investor friendly real estate agents to locate active and expired listings that could make good rental property investments.
How Many Residential Mortgages Can I Have
Can you have 2 residential mortgages? As a residential mortgage is usually designed to be taken against your main residence it is not always straight forwards to obtain more than one. Lenders want to avoid offering residential mortgages against properties that will actually be let out, so they will require a good explanation for why you want to take on an extra property and how you will use it.
Second homes that will be used to accommodate relatives, to reduce commuting times during the working week, as a holiday retreat or even to get into a particular school catchment area are good examples of situations that will often be accepted.
Holiday lets are slightly different as you would be renting the property out rather than using it all for yourself. As a result these typically fall into the buy to let category with specialist lenders the most likely to help.
You can read more about this in our second home and holiday let mortgage guide.
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Reasons To Consider Creating An Llc
What Qualities To Look For In A Lender
Chances are you may be feeling a tad bit scrutinized by this point, so lets turn the tables and take a moment to consider what to look for in a broker and a lender. Lets assume you are a safe investor with a sustainable rental income property you are seeking financing for. As you shop for a broker and lender remember that you are valuable and you want a lender who is going to treat you fairly now and in the future.
Since qualifying for a rental property mortgage is a touch more challenging than the typical residential mortgage you will want to ensure you find a broker who is experienced in this area. Feel free to ask your broker about their experience, look for reviews from friends or read through testimonials. As we mentioned earlier if you are looking to purchase a property with five or more units you will need to find a broker who specializes in commercial mortgages .
Once you have picked your broker, essentially you have a captain of your team. Together you will need to put the rest of your team together, starting with a lender. Have we mentioned that this is a long term commitment? Be wary of your initial attraction to low rates and instead take a moment to read the fine print before committing long term. Just like dating you will want to start by asking the awkward questions that will shape your relationship over the long haul.
Here are a few questions to consider when comparing lenders and products they are offering:
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Financing Five To Ten Rental Properties
For this number of rental properties, the bank will finance your real estate investments if:
1. You have a credit score of 720
2. You have six months worth of reserves for protection against vacancies
3. You have a down payment of 25% for single family homes and 30% for multi-family real estate properties
4. You do not have any history of foreclosures or bankruptcy
5. You did not fall behind on mortgage payments for the last year
Note: Even though the bank will agree to finance multiple rental properties this way, it will push over the ownership and the risks towards Fannie Maes 5-10 Financed Properties Program. To learn more about this program, visit Fannie Mae Official Site.
Why Dont Big Banks Like To Lend On Rentals
I think long-term rental properties are one of the best investments. Part of my retirement strategy is buying as many long-term rental properties as I can. The problem with buying many properties is most lenders dont like lending to an investor who already has four mortgages. Most big banks will tell you it is impossible for them to give the fifth mortgage to anyone. The big banks have strict policies about loaning to investors because their primary business is lending to owner-occupied buyers. There is no law that says they cannot give investors more loans, it is simply the banks policies.
Most big banks will sell their loans off to other banks or as mortgage-backed securities. Because they sell their loans and do not keep them in-house as a portfolio lender does, the big banks have much stricter guidelines.
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How Many Units Does The Property Have
If there are 1-4 then the property will be zoned residential and securing a mortgage is just a touch more challenging than a typical residential mortgage. For these smaller properties, the loan to value rate will be up to 80%. On the other hand, if the property has 5 or more units then this will now bring you into the world of commercial zoning and it will be harder to qualify for financing, if you are able to qualify chances are your interest rates will be much higher. You will also need to work with a bank or broker who offers commercial mortgages .
Primary Residence Mortgage Rules
Every mortgage application you complete will involve you answering the question of how the property you intend to purchase will be used. The options include primary residence, second home, and investment property. The option you select will play a part in determining the mortgage rates you will get. They also have different requirements that need to be met before the mortgage can be approved.
Primary residences typically get the lowest interest rates among the three options. This is because lenders generally believe that a buyer will be more inclined to repay a mortgage for the house that they live in. The fact that it is the roof over your head is extra motivation to keep up with payments. It is also due to this reason that mortgages for primary residences come with the lowest value for down payments and are the easiest to get.
The boxes that a property must check for it to be considered a primary residence are:
- You have to live in the home for most of the year.
- The home must be within reasonable proximity to your workplace.
- You have to start living in the house within a 60-day period after closing the mortgage.
Buyers should also note that refinancing a primary home mortgage requires proof of residency.
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Qualifying For A Mortgage When You Own Multiple Homes
As you buy more homes, whether you finance them or not, youre generally going to be asked for more paperwork each time. To make your life easier, youll want to have your paperwork organized so your loan officer and mortgage underwriter can easily review your loan for qualification and, ultimately, final approval.
The chart below provides a checklist to keep handy when youre applying for a new loan and already own more than one property.
|Type of information|
Why You Should Start By Speaking To An Investment Mortgage Broker
The best way to kickstart an investment mortgage application is by speaking to a broker who specialises in the type of finance youre looking for. In our broker network, there are commercial mortgage experts, buy-to-let specialists, holiday let advisors and brokers whose bread and butter is overseas property. Whatever type of investment youre planning to make, we can find you a mortgage broker who advises in that field every single day.
An investment mortgage broker will know exactly which lenders are best positioned to offer favourable rates to a customer with your needs and circumstances, so you can rest assured that youll find the right one first time and end up with the best possible deal.
A broker will search the entire market for you, tracking down every product that meets your specifications, offer you bespoke advice throughout and help you with the paperwork.
Since the market is so vast, attempting to navigate it without the expertise of an investment mortgage broker could mean you end up paying more for your mortgage, waste time looking for the right product and are left with unnecessary marks on your credit report.
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Tools To Help You Calculate Your Expenses
If youre a financial nerd like me, you will probably already know your current expenses and even have a detailed spreadsheet! But if youre not a nerd yet, here are a few tools to help you get started calculating your personal expenses:
- Spreadsheets this is always a very simple, effective, and flexible tool to track your expenses. You can use my personal finance spreadsheets by getting my updated and free Real Estate Investing Toolkit.
- Mint.com This is a free online tool from Intuit that automatically tracks your personal expenses by pulling data from your bank accounts and credit cards.
- YNAB This is a paid software app that has more bells and whistles than Mint. I have not used it personally, but you can read a good review from my blogger friend J Money at budgetsaresexy.com.
If you have not calculated your expenses before, just know that it wont be a quick 60-second exercise. But its not overwhelming either. I recommend scheduling a few hours on a weekend to really dig into the numbers.
But for now, just make an educated guess and lets move on to the next step.
How Multiple Property Roi Can Significantly Increase Your Cashflow
Why invest in real estate with mortgages anyway, you may be asking. After all, isnât it better to be debt-free?
Putting other peopleâs money to work for you can greatly increase your cash flow and potential ROI â an example of what we call âgoodâ debt.
Good debt is money youâve borrowed to make an investment in an asset that will produce income.
Good debt is âgoodâ because you’ll earn more money than the debt costs you.
Letâs look at how this process of investing in real estate with multiple mortgages works.
Letâs say that you have $100,000 to invest and the average purchase price in your chosen market is $100,000.
You pay cash for one property, which returns $800 per month in rent.
After expenses, such as taxes and homeownerâs insurance, you clear $725 per month in net cash flow.
Now, imagine that you took that same $100,000 and financed five similar properties with down payments and out of pocket expenses of $20,000 each.
Each offers that same ROI of $725/month with a monthly mortgage payment of $520 on each property.
Now, instead of clearing $725 per month you are clearing $1,025 per month and building equity in five properties each month.
Every year or two, youâll be able to increase your rent, thus increasing cash flow while the amount you pay in carrying costs remains more or less the same.
At the same time, those properties will increase in value. The annual appreciation rate for real estate is 3.7%.
Thatâs a huge difference!
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Land Is A Finite Resource
There is a reason many people invest in real estate: land is a finite resource, and therefore it will over time increase in value. How fast those increases occur and in what areas are some of the variables, but in general land is a solid investment.
Its undeniably convenient that, in putting a roof over your head you can at the same time be providing for your future. Its also true, however, that there will always be people looking to rent, and becoming the person that they rent from can be a great way to generate some income for yourself and pay down the mortgages you use to acquire property.
Lenders actually acknowledge this in the way debt servicing ratios are calculated when theres a rental in the mix. But before we get to that, its important to note that there are two distinct situations where you might have rental income: owner occupied plus rental properties and non-owner occupied rental properties.
As far as determining the actual rent amount to use, in the early stages this can be estimated by your broker for qualifying purposes, and then down the road it is usually confirmed either by a signed lease if the rental is already occupied or a fair market rent letter produced by an appraiser if its not.
See How Much You Can Afford
The price for a multi-unit or single-family property may be high, but rental properties have rental income to help offset your costs. This rental income, along with the amount of your down payment and your other income will help determine how much you can afford.
Keep in mind that to qualify for a rental property mortgage, you need at least 20% for a down payment. When thinking about how much you want to spend on a rental property, make sure you also consider closing costs and other one-time costs.
Use our affordability calculator to see how much you can comfortably spend on a rental property.
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Calculate Your Current Personal Expenses
Financial blogger JD Roth says your current expenses are the best starting point to figure out how much money you need to save for retirement. Once you know your current expenses, you can then make adjustments to figure out your future needs.
The problem is that many of us dont really know our personal expenses. Sure, you spend less than you earn. And you probably save a lot of money too.
But if you want to gain extreme confidence in your plan and possibly retire earlier than you thought, you need to know your expenses with more certainty.