Home Owner Occupied First, then Rent out

[Myles MacMillan]

Hello All,

I'm a Canadian, living in Winnipeg who is just starting out into the REI world and looking to get into buy-and-hold single family homes. I'm excited to get started, however coming up with the 20% down payment is going to take some time. My realtor suggested that I buy a property now and move into it with 5% down (which we can do in Canada), live in it for a year then rent it out and buy another for 5% down. I'm not sure if this is good advice for a couple reasons. The first of which is that I want to do everything "above board" and when we bought our current home a few years ago (for 5% down), I remember there being a clause in the mortgage paperwork that said the home had to be "home-owner occupied". Is anyone here savvy with bank-financing contracts? I would like to know what the implications of following my realtors suggestion would be in the eyes of the bank? I doubt I would have 20% equity into the property after 1 year which is what you normally need to get a rental property mortgage here in Canada. I also like the idea of having at least 20% equity in a property incase something happens in the market or personally and I need to sell the home. I would like to know that when I sold, the sale price would most likely cover the loan which may not be the case with a 95% LTV mortgage.

Any advice would be greatly appreciated!

[Roy N.]

@Myles MacMillan

Your real estate agent seems to have glossed-over the finer details of the CMHC high-ratio financing for owner-occupants (ostensibly first-time home buyers).

The clause you recall in your earlier paperwork is correct. The high-ratio insured financing which enables you to acquire a SFH or duplex with only a 5% downpayment is for Owner Occupants. If you later move out of your home, you are suppose to bring our ownership ratio to conventional levels (an LTV of 80%}. While no-one typically checks on this (until renewal time), you would technically be in violation of your financing covenants.

Another thing, your real estate agent may not have mentioned is that you are only eligible for one CMHC (or private) high-ration insured financing at a time. So if you buy a house/duplex with 95%LTV high-ratio, insured, financing and move out a year later, you would not be eligible to finance another property in the same manner until your equity stake in the first property to 20% (or better). Yes, people have managed to do this (and some foolishly brag about it), but there will be a clause in the application paperwork where you attest that you have no other properties with a high-ratio, insured mortgage. To make this attestation, knowing you have an insured mortgage on another property constitutes fraud.