Mortgage Q&A: “Are mortgage rates higher for investment properties?”
So you’ve decided to purchase an investment property to make a little extra cash on the side.
Well, before you make your move, know that mortgages rates are significantly higher for investment properties.
On top of that, qualifying for a mortgage on a rental property is a lot more difficult as well.
So not only will you end with a higher mortgage rate, but you’ll also have to bring more money to the table for your down payment, as loan-to-value ratios are typically much more restricted.
Gone are the days of 100% financing on investment properties folks – and who knows if they’ll ever return.
How much higher are mortgage rates on investment properties?
It’s difficult to say your rate will be “X percent higher” because there are so many different combinations and a large number of issuing banks, but you could pay a percentage point or two higher.
For example, 7% vs. 5%, which is certainly significant, especially if we’re talking about an expensive rental property, such as a 4-unit property.
If your investment property is 3-4 units, as opposed to 1-2, expect another pricing adjustment.
If it’s also a condo, watch your rate climb even higher.
* You may get a discount if you go with a 15-year fixed vs. a 30-year fixed.
Why are rates higher on investment properties?
Well, banks and mortgage lenders see investors as riskier borrowers than homeowners.
After all, if you live in your home, there’s less of a chance you’ll walk away if things go south. There’s probably a better chance you’d ditch your investments before your primary residence.
And if you occupy it, there’s a better chance you’ll maintain it properly and keep it in good shape. Pride of ownership and all that.
Most investors are also homeowners, so if they had to choose, they’d probably pay their own home’s mortgage first…and not displace their entire family.
This explains why many investors pay with cash or commit occupancy fraud to obtain lower mortgage rates. In other words, telling the lender you plan to occupy the investment property as your primary residence and then quickly renting it out after obtaining financing.
Read more: Are mortgage rates higher for condos?