Question About Mortgage Lenders and Rental Property

Good day all,

I currently have two rental properties and I'm planning on buying a house to be my primary residence in the next two to three years. I understand that lenders will consider a certain percentage of rental income as income towards qualifying for another mortgage. My question is:

My first rental property is less than 5 years away from being paid off completely and if need be I can pay it off early. Obviously it would cash flow a lot more once it's paid off. Do lenders consider such things? Or do they just look at monthly rent and don't consider/care if the property is mortgaged? Would a lender rather see that mortgage cleared so I'm not as leveraged even though it's rental?

I know I should probably ask a mortgage broker, but I know some of you have/had rental properties and maybe have been in a similar situation.


Any advice is appreciated

Leverage the rentals to the max and use the proceeds to buy your house.

You can write off your rental interest, you can’t write off your homes interest.

Seems like a unique situation you would be silly not to take advantage of.

Your resultant loan amount on your primary should then be reduced significantly such that you won’t need as much income on your application, at least presumably.

@ercchry

1) no idea what the best way to get approved for your third mortgage is, ask your broker or ercchry
2) I think Killy is right that you want your rentals to carry the bulk of the interest payments so that amount can be written off against any income.

So, I’d say the best strategy requires way too much detail to publicly discuss… but here are some things to help you figure it out:

Rental offset:
All lenders have a different approach to percentage and what expenses are included, it can range from using 80% of the rent against the mortgage, property taxes, and half the condo fees to 50%, and only the mortgage payment.

The trick here though is have your existing property mortgages in place first, as if the lender is doing a refi for down payment and the new purchase all at once they are using the stressed payment (rate+2%) to qualify that rental vs actual payment as they would if it already is in place.

So after they put all the above into the worksheet they get a +/- monthly amount and that’s added to either your income or your liabilities. A good broker will use the worksheet and submit like this, one that doesn’t deal with complex deals will use their submission software which is less beneficial.

Tax advantages (like Killy mentioned) is great, but depending on the above plus your useable income, it’s hard to say if the numbers will workout, and pulling equity out of the properties means today’s rates on a minimum of that new money you’re pulling out, that of course ruining your current cashflow , and will depend on how reliant you are on that cashflow, also your rental mortgage rates will be higher than your primary rate, so will have to play with some scenarios to see what works best

He’s taking new financing either way so I would say the “todays rates” thing is irrelevant.

You can reduce your rental net income “cash flow” ( tax efficient ) or increase your primary residence mortgage payment ( not tax efficient).

Hopefully if you are doing this you aren’t anywhere near your total lending capacity. The answer as always…

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Originally Posted by ercchry

So, I’d say the best strategy requires way too much detail to publicly discuss… but here are some things to help you figure it out:

Rental offset:
All lenders have a different approach to percentage and what expenses are included, it can range from using 80% of the rent against the mortgage, property taxes, and half the condo fees to 50%, and only the mortgage payment.

The trick here though is have your existing property mortgages in place first, as if the lender is doing a refi for down payment and the new purchase all at once they are using the stressed payment (rate+2%) to qualify that rental vs actual payment as they would if it already is in place.

So after they put all the above into the worksheet they get a +/- monthly amount and that’s added to either your income or your liabilities. A good broker will use the worksheet and submit like this, one that doesn’t deal with complex deals will use their submission software which is less beneficial.

Tax advantages (like Killy mentioned) is great, but depending on the above plus your useable income, it’s hard to say if the numbers will workout, and pulling equity out of the properties means today’s rates on a minimum of that new money you’re pulling out, that of course ruining your current cashflow , and will depend on how reliant you are on that cashflow, also your rental mortgage rates will be higher than your primary rate, so will have to play with some scenarios to see what works best

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Thank you for the detailed response. Lots to consider for sure so I'll definitely use some professionals when the time comes. I tend to avoid debt and don't like to be too leveraged up but I'll have to see what ends up being the better strategy for the long term. I'm fortunate that my rentals are currently on very low fixed rate mortgages for the next four and a half years. I'll have to see where rates are going when the time comes as well.

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Originally Posted by killramos

Hopefully if you are doing this you aren’t anywhere near your total lending capacity. The answer as always…

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No I wouldn't be near my total lending capacity. I'm fairly risk averse and avoid debt as much as I can. The wife and I have good incomes and a good chunk of cash already earmarked for downpayment and we don't plan on borrowing anywhere near our borrowing capacity.

Quote:

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Originally Posted by KrisYYC

No I wouldn't be near my total lending capacity. I'm fairly risk averse and avoid debt as much as I can. The wife and I have good incomes and a good chunk of cash already earmarked for downpayment and we don't plan on borrowing anywhere near our borrowing capacity.

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I approve this message.

Quote:

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Originally Posted by killramos

He’s taking new financing either way so I would say the “todays rates” thing is irrelevant.

You can reduce your rental net income “cash flow” ( tax efficient ) or increase your primary residence mortgage payment ( not tax efficient).

Hopefully if you are doing this you aren’t anywhere near your total lending capacity. The answer as always…

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Yes, but owner occupied money is cheaper than rental property money… ~0.5% difference, maybe even more as refi vs purchase rates can vary as well. but that’s assuming the current lender will do a blend and extend on the existing loans, and that the new rate is within range of current market rates.

Basically, you’re missing too many variables to say the tax savings will offset the increased cost of borrowing