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Whether you’re just starting to dip your toe into the waters of real estate investment or have been at it for a while, there’s always more than you can learn. When you begin to enter the realm of investment in this manner you start to find that there are many financial options and challenges that you might not have exactly anticipated—this is completely normal, and it pays to spend the time understanding exactly what your choices are and how you can choose the most advantageous one. Investor mortgages are a common vehicle for real estate investors in Canada to finance their ventures, but what exactly are they, and what should investors know about their possibilities and limitations?
What is an investor mortgage?
Most people are familiar with the concept of a mortgage when it comes to the home that they occupy. If you bought your primary residence then chances are you’re going to have a mortgage—you owe a set amount every month, with some of the money going towards the principal of the loan and some of it going towards the interest. This is a relatively straightforward process that gives you the chance to easily finance a venture that will serve as your family’s primary means of shelter. However, things get a bit more complicated when it comes to an investor mortgage. These are dependent on things like the number of units in your investment property and whether or not you’ll be occupying the space—all can lead to changes in the terms and advantages of the loan.
What are some different criteria for investor mortgages?
Investor mortgages differ mostly based upon the size of the property that you’re investing in. In general, if the property that you’re buying has 4 units or fewer, then it will be zoned residential. This means that the mortgage process will be pretty straightforward and will not be all that different from the process of getting a mortgage on your primary residence. If your investment property has five units or more, then things start to get a bit more complex. This means that the property will be zoned commercial, so a commercial mortgage is required. These are a bit more complex than other types of mortgages, but it’s still possible to get one with relative ease.
What should I know about down payments?
The down payment is the amount of money that you need to be ready to put down towards the principal of a mortgage from the start. When it comes to investment properties you’re going to have some discrepancy on what this amount is going to need to be—this is mostly dependent on the number of units in the property that you’re investing in as well as whether or not the units are going to be owner-occupied. Owner-occupied means whether you, the owner of the property, will live on the premises. While this might not sound like a big deal, it can have an impact on the required down payment. Typically, if a property investor is not living in the property that they’re investing in, they will need to pay a higher down payment.
What is a non-resident?
Canada is recognized around the world as having one of the most investor-friendly real estate markets for international investors, but there are still some caveats. For starters, what makes a non-resident might surprise some people, as it has nothing to do with citizenship. Instead, people are defined as non-residents if they do not earn an income in Canada and also do not file taxes here. This changes their financial situation when they begin looking to invest.
How does being a non-resident affect my loans?
This varies depending on what country you call home. If you’re an American and are intending to buy a property in Canada that you will use (rather than rent), you will typically need to come up with a 20 percent down payment as well as showing proof of income. If you are from anywhere else in the world, the same conditions apply except that the down payment must be 35 percent. All non-residents, when applying for mortgages in Canada, must come up with a proof of income (letter of employment, pay stubs, etc.), proof of down payment (usually a bank statement), a reference letter from a non-Canadian bank and either a report from an international credit bureau or your bank statements from the last six months to verify your financial picture.
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What else should I know?
While most of the above criteria are true for both owner-used units and investment properties, one other thing that you want to keep in mind as a non-resident investor is that tax rates could be different depending on your residency situation. These tax pictures are usually quite fluid and can change slightly year to year, so we recommend that you contact a qualified tax professional to make sure that you’re fulfilling all of your tax obligations in Canada. There might also be an interview process attached to receiving a mortgage in Canada as a non-resident, so be prepared to speak over the phone with a representative about your financial situation and health.
Canada is recognized around the world as one of the countries most welcoming to foreign investment. We are proud that so many international residents want to invest in our properties, for reasons ranging from making their home here to having a vacation home to hoping to generate rental income. If you’re a non-resident, then rest assured that you still have every right to acquire a mortgage in our country, but you should know going in that your requirements may be more stringent than they are for Canadian residents.
All of this due diligence will quickly pay off, however, when you are enjoying your new property in Canada and potentially even earning investment income on your endeavour. As with all investment decisions, especially those that require an international presence, be sure to consult with a tax professional so that you can make an informed choice.