So, lucky homeowner, you’ve got one property and are still paying off the mortgage. But while the market’s down a second property is looking more and more appealing. You’ve done all the math and you can totally afford the extra monthly mortgage payments as long as you’ve got rental income coming in. The problem is, with your budget stretched thin paying off your current expenses, coming up with the down payment is a bit of a hurdle. If only there was a way to minimize the cash needed to put down on your second property!
Today we’re answering an increasingly common question that our realtor partners seem to be receiving: how little down payment do you need for an investment property?
How little down payment do I need for a second property?
Before we look at “can we?”, let’s first ask “should we?”. It’s important to remember, the less money you pay on the down payment for your property, the higher your monthly mortgage payments are going to be, the longer it’s going to take for you to pay off the mortgage, and the more interest you are going to end up paying to your lender. Stress tests to check your approval for a mortgage are not only in the lender’s interest, but also to protect you, the borrower. The general rules of mortgage lending are there because if you fall below the typical qualification requirements, there’s a higher likelihood you might not be able to pay your mortgage. Whether that’s because of inflation, losing your job, or any number of other reasons, it’s best not to risk being in a position where you can’t pay your debts. For mortgage lenders, lending to clients who put down less money on their property, which could lead to failing stress tests, represents unnecessary risk. Would you lend money to someone if you did the math and they’ll be $100 each month away from being in the red?
Many people love to fantasize about their property massively appreciating in value while they put in a fraction of the home value as a down payment. On the flip side, most people don’t consider what could happen if the market goes down, interest rates rise, and your precarious financial position is put to the test.
With that being said, as a mortgage lender, we make more money when borrowers get a bigger mortgage. It’s in our interest for you to do it, but don’t say we didn’t warn you!
Alright, alright, but can I do 5% down?
Here’s the short answer: yes, but you will have to sacrifice by going with a higher rate and stricter other requirements, and not if the second property is a long-term rental.
In the mortgage world, there are typically two numbers that are talked about: 20% and 5%.
20% represents the usual “recommended” amount to put down on a home for most buyers. The reason for this is that below this level, most mortgage lenders require you to buy mortgage insurance to protect them in the case that you can’t make your payments. Saving on insurance payments is a big motivator for a lot of people to meet that 20% mark, and generally putting this much down represents a fair balance between making the monthly mortgage payments affordable and a sum that the average buyer can afford.
5% represents the minimum down payment you could make on home under specific circumstances, hence the topic of this article.
However investment properties and long-term rentals are not eligible. To qualify for a 5% down payment your second property will need to be a single family home, town house, or condo. You should also know that the maximum mortgage amount when doing 5% down is $700,000 in Toronto, Calgary, and Vancouver. Now, obviously you aren’t buying another property just to leave it empty. If you live in your second property for part of the year, and do short-term rentals like Airbnb, then you could still qualify for a 5% down payment however, again, it is not supposed to be an investment property so tread with caution. Another possible outcome is after moving into a new home that you plan to occupy yourself, you could convert your old home into a rental property instead of needing to sell it. But if you plan to do this confirm with your mortgage advisor if your existing mortgage lender allows for it.
You might be reading this and thinking: “Great! So I can put 5% down on my second property!”. But be warned, just because it’s possible doesn’t mean you can afford it. First of all, there’s the monthly mortgage payments to consider, which of course will be higher as you are borrowing more money and have a larger principle to pay interest on. Second, as previously mentioned you will need to purchase mortgage insurance. Finally, and this may be the kicker, you will likely get lower rates and stricter qualification requirements from your lender. If a borrower is stretching their monthly budget too thin, lenders are less likely to approve them for a mortgage. This means you may end up needing to go with an alternative lender with worse rates than your average mortgage brokerage.
Still seems like a good idea?
If you’ve done the math and have a high enough income to get qualified for a second mortgage with a 5% down payment, it might be the right choice for you. Ultimately it’s important to take your time and do your research on what you can afford, and find out what will end up costing you more in the long term. At Perch we’ve got the homeownership solutions for you, whatever your choice. If you’re looking to shop rates and get quickly approved, you can do so from the device you’re on right now. If you’re still trying to figure out the right move, we’ve got every tool you need, as well as dedicated mortgage advisors who can help you with your exact situation.
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