Canadian Rental Properties

[Sarah Robertson]

Looking for Canadian rental property mortgage advice.

How long do Canadian investors set their mortgages?

In the US it’s most beneficial to choose a 30 year fixed.

Here in Canada you can have a 30yr mortgage, but you must renew every X number of years (usually every 4-5 years if you want a low interest rate).

Unfortunately anything above a 15 year fixed seems a bit risky, especially with the threat of a possible economic crisis upon us.

I would hate to have several 25-30 year mortgages at 3.4%, and in 5 years being forced to renew at 8%+ for the remainder.

It seems to me, it would be the safest plan to pay off one mortgage at a time as soon as possible, then invest into another property to avoid getting caught in foreclosures.

However, doing it this way eliminates the power of leverage... how do Canadians do this while reducing risk?

[Roy N.]

Originally posted by @Sarah Robertson:

@Theresa Harris

But say you have 5 mortgages set for 25 years @4%, then our economy crashes, and then your interest rate go up to 8% at your next renewal? 

Aren’t you worried that you won’t be able to keep up with the interest increase since you can’t just increase your rent? 

Sara:

We bought our last "residential" property in 2017.   As part of diligence, I modelled the property as though our financing rate would be 6%.  After purchase we financed at 2.6%, which has since risen to around 3, however I know the property (without any improvement in rent) will survive at 6%, so there are no cashflow concerns.

If you believe interest rates are going to rise, then you should plan accordingly.   Say you are acquiring a property at $238K with 20% down; your financing principal would be 190,400.  Amortized over 25yrs at 4%, your default monthly mortgage payment would be  $1005.00.   If you believe rates are going to raise to 6%, then model your property at that rate:  which would yield a monthly payment of ~$1230.00.

If the deal cash-flows with a monthly payment of $1230, then you know you will be fine with a 2% rate increase.   To hedge against this (and lower your overall interest paid) you could set your payment to $570.00 bi-weekly ['cause everyone knows an accelerated bi-weekly payment is an easy way to shave 5-years of your amortization]  even though the interest rate is at 4%.  The extra principal paid down each month will shave years off your effective amortization and thousands off your cost of borrowing.    If you are using a variable -rate product, then any adjustment in interest rate will be absorbed within your current payment ... and the extra still goes to principal pre-payment.