So What Is Mortgage Stress
There are various definitions of what mortgage stress is, but its most commonly defined as a household spending more than 30% of their pre-tax income on their home loan repayments.
The underlying premise is that at these levels of debt, the average homebuyer will be struggling to repay their loan.
Around Australia house prices are up more than 20% over the last year, but thats an average and in some suburbs, properties have increased 30 to 40% over the last two years.
While the current property boom has been favourable to those already in the property market, the rise in property values has been considerably more than the minimal rise in incomes, meaning that would-be buyers are either frozen out of homeownership or have to pay a significant portion of their income to service a home loan.
Those commentators concerned about mortgage stress remind us that last year the governments, banks and financial institutions gave various support packages to reduce the risk of mortgage defaults, but these have now in general been removed.
Yet looking at mortgage defaults or mortgage arrears with our banks would suggest that very few Australian households are currently suffering mortgage stress, and many are well ahead in the mortgage payments.
And we know that the banks have been only lending money to those who could comfortably handle a 2.5% increase in the mortgage rate and as of the beginning of this month this buffer has been increased to 3%.
The Complete Guide To Investment Property Mortgages In 2021
If the road to real estate riches were an easy one, everyone would be a millionaire landlord or house-flipper.
Making big money from investment property is rarely as simple as buy low, sell high. It requires careful research, planning, hard work and a dollop of good luck.
But as long as you make real estate investing decisions with your eyes wide open, the financial rewards could surprise and delight you.
In 2019, the average gross return of house flipping purchasing, renovating and quickly reselling homes was 39.9%.
In other words, the average house flipper earned $39,900 for every $100,000 invested.
The average return on rental properties in 2019 was 15%. This means the average buyer of a $500,000 apartment building earned $75,000 in a single year!
By contrast, the average stock market return over the past 50 years was about 8% while the average investors return on mutual funds was between 4-5% over the last 30 years.
In this article:
Before examining the benefits of buying investment property, lets bust two persistent myths:
Myth 1: Buying a primary residence is the same as purchasing an investment property.
Fact: Although many people think of their homes as investments, a home is not an investment property unless you buy it for the express purpose of generating rental income or a profit upon resale.
Myth 2: Home values have always risen, so a primary residence will end up being an investment property if you own it long enough.
Can You Avoid Higher Rates On A Second Home Mortgage
When you apply for a mortgage loan, you must declare how you intend to use the property. And lenders take such declarations seriously. Thats because they dont want to finance riskier investment properties with residential financing.
It might be tempting to list your second home as a primary residence, and profit from lower interest rates or easier qualification. But its unwise to do so.
Lying on a mortgage application can land you fines in the thousands. In very serious cases, mortgage fraud can even lead to jail time.
So always be truthful with your lender. And ask plenty of questions if youre not clear on the loan rules. For instance:
- Are you allowed to have overnight rentals?
- Are there limits regarding how many nights you can rent?
- How much time must you spend there for it to qualify as a vacation home instead of an investment property?
- Can you have an accessory dwelling unit?
Get answers in writing to ensure you fully understand the requirements for your second mortgage.
And if youre having trouble qualifying with one lender, or finding the loan program you need, try another lender. They all have different loan options and rates.
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Investment Property Rates Vs Primary Residence Rates
There is a difference between primary residence mortgage rates and investment mortgage rates. Although you will find investment property interest rates to be higher, theyre not always significantly higher. Investment property loans typically carry an additional 0.5% to a 1% surcharge on the interest rates.
Best Investment Property Loans Of 2021
- Best for Single-Family Homes: Citibank
- Best for Commercial Property: Lendio
- Best for Rehab Loans: LendingOne
Why We Chose It: We chose Quicken Loans as our best overall investment property lender because they lend nationwide, offer a wide variety of loan types, and make applying for a mortgage online very easy for the borrower. Quicken provides competitive rates as well, which helps solidify its position as the best overall mortgage lender.
Online application and live agents to talk to
Instantly verifies employment and income for more than 60% of working Americans
Custom fixed-rate loan terms that are between eight and 30 years
Offers agency loans with 3% down payment
Quicken Loans doesn’t offer home equity loans or HELOCs
No branches to visit in person
Doesnt consider alternative credit data, only credit scores and debt-to-income ratio
Formed as a brick-and-mortar lender in 1985, then moving online in 2000, Quicken Loans rise paralleled the growth of the internet.
Quicken Loans is our best overall investment lender because they are easy to use for investors nationwide. They offer a large portfolio of loan products that can be tailored to your needs when you complete their online application.
Quicken Loans lends on residential and multi-unit investment properties with fixed- and adjustable-rate home loans, mortgage refinancing, FHA, USDA, and VA loans, and jumbo loans for higher-priced homes.
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What Are Investment Property Mortgage Rates Based On
An investment property is one which is bought with the intention of making a profit rather than being primarily as a residence. This can include properties bought and then improved to increase their value, or those bought and then rented out to produce an income. There are several factors which affects investment propertymortgage rates.
While somebody getting a mortgage for a residential property must show proof of income from employment, an investor must show what income they expect to make from the property. An investor who has secured a reliable tenant paying more in rent than the mortgage repayment amount will likely get a better deal. Somebody buying a property to improve and sell will have a harder time securing a good rate unless they can prove they have the funds to make monthly payments in the meantime.
Not all the factors specific to investment property mortgage rates affect them in the same direction. For example, somebody getting an investment mortgage is more likely to be offered the option of a deal with no downpayments. Somebody taking up such a deal, known as a 100% mortgage, will be more likely to be offered a higher interest rate. However, somebody buying a property to let in a desirable area is more likely to be offered a lower rate as there is a greater chance they will be able to make the scheduled repayments.
The Math Behind Rental And Investment Property Loan Rates
The rates that mortgage lenders charge are not entirely up to a lender. Property lenders frequently adjust rates so that they match up to the rules that have been set by Fannie Mae and Freddie Mac.
Freddie and Fannie set fees and rules for the majority of mortgages of today. The fees that they are charging have a direct impact on the interest rate that you will finally pay.
Thanks to increased risks surrounding refinancing or purchasing investment properties, Freddie Mac and Fannie Mae charge a higher fee on these transactions. These fees will trickle down to the borrower as an increased interest rate.
For example, a 20% down property investment loan will attract a fee that equals 3.375% of the overall loan amount.
This equates to $3,375 for every $100,000 borrowed.
In most instances, the borrow will choose to pay higher interest rates rather than having to pay extra in the closing costs. So, in what way do the fees translate to a final rate?
In this example, 3.375% in property loan investment fees could be covered by adding an extra 0.5% to 0.75% to the rate.
This only applies to single-family homes. If you decide to invest in a duplex, the fees may increase by another 1.0% or 0.125% to 0.250% will be added to the rate.
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What Can I Do With An Investment Property
There are several uses for a residential investment property, including:
- House flipping, which can be done after making home improvements that increase the propertys value
- House hacking a multiunit home, which allows you to live in one unit and rent out the other unit to cover your mortgage payments and create a passive income stream
- Providing short-term rentals through a platform like Airbnb
- Providing long-term rentals in six- to 12-month increments
Lets Look At What Could Cause A Housing Market Crash
There is no doubt that at some time in the future we will experience a cyclical property market correction, but there is no need to worry about a house price collapse like some property pessimists are suggesting.
House prices collapse when people are forced to sell their homes and there is no one willing to buy them.
I accept that properties are expensive at present but that doesnt mean property values will crash, especially in our capital cities.
In fact, theyve never crashed since housing market data has been collected in Australia.
Instead, what tends to happen is an orderly correction, with prices only falling slightly, because homeowners choose to simply remain in their home and ride things out, while most property investors also try and hold on rather than realising their capital loss.
On the other hand, a truecollapsein house prices would require a significant external shock such as:
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Benefits Vs Risks Of Investment Property Mortgages
There are a number of benefits and risks involved with taking out an investment property mortgage.
- Regular monthly income. If you rent your property out, youll get a regular monthly income or at the very least you can use rental money to pay down your investment property mortgage.
- Potential tax deductions. If your expenses are higher than your rental income, you can deduct your losses to reduce the amount of money you have to pay at tax time.
- Tax benefits. You can also claim costs for managing your investment property on your taxes to get bigger tax breaks.
- Capital gain. Your investment property will likely gain equity over time and you can sell it to get a lump sum of cash if the market has appreciated.
- Flexible asset. You can modify your property to fit your needs. For example, it can be a long-term rental property, a short-term vacation rental or a fixer upper that you sell to get a high short-term return.
Your Mortgage Rate Likely Will Be Higher
In a low interest rate environment, the interest rate on a mortgage for a rental property is still relatively low. For most borrowers, the rate will be about three-quarters of a percentage point higher for an investment property than it would be for a primary home, Dalzell says, or about the mid-3% range currently.
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Investment Properties In Canada
Buying an investment property is a popular option for Canadians looking at different ways to invest their money. However, unlike the mortgage you took out on your principal residence, financing an investment property is a little more complex. The number of units in the building and whether or not you’ll be occupying one of the units are the two major components that control what your financing will look like. Lets take a look at how investment property mortgages work in Canada.
Should You Flip Or Rent
Should you flip houses or purchase rental properties?
It all depends on your goals, and to what degree you can leverage your skills, expertise and your current financial situation.
In general, house flipping is usually the bigger gamble because these deals hinge on whether property values will rise in the near future. Although price depreciation is never a good thing for property owners, stable and/or falling prices have less impact on someone whose main source of income comes from rents versus a fast resale of a property.
In mid-2017, the highest flipping returns were in Pittsburgh, at 146.6% Baton Rouge, LA, at 120.3% Philadelphia, at 114% Harrisburg, PA, at 103.3% and Cleveland, at 101.8%, according to ATTOM Data Solutions. These cities topped the list because they had lots of affordable, older homes that could be quickly renovated. At the same time, housing prices there were also rising.
For rental properties, the best markets in early 2017 were Cleveland, with an 11.5% annual return Cincinnati, at 9.8% Columbia, SC, at 8.6% Memphis, TN, at 8.5% and Richmond, VA, at 8.2%. The worst markets were generally located in the biggest cities on either coast, where real estate prices have long been sky high.
But local markets are always changing. Like any other type of investment, real estate carries both risks and rewards. You can reduce the risks by thoroughly researching markets and your financing options, but you can never entirely eliminate them.
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What Is The Difference Between A Fixed And A Variable Interest Rate At Td
A fixed interest rate means your interest rate, along with your principal and interest payments, will stay exactly the same during your mortgage term.
With a variable interest rate, your interest rate can fluctuate based on changes in our TD Mortgage Prime Rate. While your payments will remain the same, the amounts from each payment that go toward the principal and interest can vary.
Best For Veterans: Veterans United Home Loans
Veterans United Home Loans
Why We Chose It: We chose Veterans United Home Loans as our best investment property lender for veterans because the firm specializes in VA-backed mortgages with experts who understand this loan program better than anyone else.
Offers 24/7 customer service over the phone
Has online application and pre-qualification
Employs advisors from each branch of the armed forces
Doesn’t offer home equity loans or HELOCs
Information on FHA, USDA, and conventional loans is harder to find on its website
Charges higher rates and fees than some other lenders
Founded in 2002, Veterans United is a full-service lender that specializes in VA loans for qualifying veterans, active service members, and their spouses. They are one of the largest VA mortgage lenders in terms of volume in the United States.
Investors benefit from flexible qualification guidelines, lower rates, and monthly payments, no down payments, and no private mortgage insurance. Veterans United has VA loans for as little as 0% down, and they understand how to make the VA loan work for an investor and still remain within the programs guidelines.
Among the products offered are fixed and adjustable-rate mortgages, jumbo loans, refinance loans, and cash-out loans. Loan rates change dailyMarch 2021 rates ranged from 2.250% to 3.5%withAPRs between 2.8% and 3.5%.
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What Strategies Can I Use To Make A Profit On My Property
Savvy investors tend to look at multiple property strategies to maximize their wealth creation. These include the following:
- Loss offsetting. If the expenses of an investment property are greater than the income it generates, you may be able to claim a tax deduction to recoup your losses. Talk with an accountant or tax professional to learn more.
- Buy and hold. With this simple strategy, you purchase a property at below-market value and hold onto it with the expectation that the property will grow in value over time. This strategy usually involves buying out owners who can no longer afford their payments.
- Renovate. Often called flipping a house, this technique involves buying a rundown property and renovating it to increase the propertys overall value. This is an approach that requires hard work and money, but gives you the opportunity for bigger gains.
- Passive property development. Passive property investment lets you invest in real estate without being directly involved in it. You simply put in funds to help finance construction. From there, you make automatic returns when the building is rented out.
Remortgaging A Rental Property
As with any property, there are times when it makes sense to consider refinancing a rental. Refinancing often gives the owner a chance to lower their interest rates, reduce their monthly payments, and even access some much needed cash.
Some of the key benefits of refinancing a rental property include:
- Switching from an adjustable to rate to a fixed rate Refinancing often allows property owners change the terms of their loan, switching from an adjustable to a fixed interest rate. This makes monthly payments more predictable and easier to manage.
- Lowering the mortgage’s interest rates If interest rates have dropped since the original purchase of the property it often makes sense to refinance. A lower interest rate can save the buyer money over the long-term life of the loan.
- Lower monthly payments Lower interest rates and the switch from adjustable to fixed rates can lead to lower monthly payments for the owner, helping to improve their cash flow.
- Renegotiating the terms of the loan Refinancing gives buyers the opportunity to renegotiate the terms of their mortgage, often upgrading to a mortgage that is more favorable to the buyer.
- Access the property’s equity Rental property owners often choose to refinance as a way of access cash which can be used for property improvements or put toward fresh investments.
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