Financing a rental, and the 20% down rule
Buying a property to rent out works differently from buying a home to live in, and the biggest difference shows up on day one, in how much cash you need. Here is how financing a GTA rental actually works: the 20 percent floor, why mortgage insurance is off the table, the stress test you still have to pass, and what you can and cannot deduct once the rent starts coming in.
The 20% down rule
When a property is non-owner-occupied, meaning you will not live in it, a lender requires a minimum 20 percent down payment. There is no way around this floor for a pure rental. On a home you live in you can put down as little as 5 percent, but that door is closed for an investment property.
On an owner-occupied home, mortgage insurance from CMHC is what lets a buyer put down less than 20 percent. For an investment (non-owner-occupied) property, CMHC mortgage insurance is not available, so there is no low-down-payment option. Twenty percent is the minimum, full stop.
The stress test still applies
Even with 20 percent down, you still have to pass the mortgage stress test. You qualify at the greater of your contract rate plus 2 percent, or 5.25 percent. In plain terms, the lender checks that you could still carry the mortgage if rates were higher than the rate you are actually offered.
The stress test is a qualifying check, not the rate you pay. Your actual payment is based on your real contract rate. The test just makes sure you would still qualify at the greater of your contract rate plus 2 percent, or 5.25 percent, so a rate increase down the road does not sink you.
If you live in one of the units
There is one important exception to the pure-rental rules. An owner-occupied small multiplex, where you live in one of the units and rent out the others, can have different rules than a straight investment property, including on the down payment. This is a case where the details really matter, so speak with a mortgage broker about your specific situation before you assume the 20 percent rule applies.
What you can deduct once it is rented
Once the property is earning rent, you can deduct many of the ongoing costs against that rental income. One point trips up almost every new investor: only the mortgage interest is deductible, not the principal. The interest portion of each payment reduces your taxable rental income. The principal portion, the part that pays down the loan itself, does not.
Acquisition costs and your ACB
Not every cost you pay to buy the property is deductible right away. Your acquisition costs, meaning the land transfer tax, legal fees, and the home inspection, are added to your adjusted cost base rather than deducted in the year you buy.
Your adjusted cost base, or ACB, is essentially what the property cost you for tax purposes: the purchase price plus those acquisition costs. It matters later, when you sell, because your capital gain is measured from the ACB. So these costs are not lost, they simply work for you at sale time instead of now.
Say you are buying an $800,000 property in the GTA purely to rent out. The minimum 20 percent down payment is $160,000, and that is before closing costs. On top of the $160,000 you still need cash for land transfer tax, legal fees, and an inspection, so budget for those separately rather than assuming the down payment is the whole bill.
The honest part: it may not cash flow
Putting 20 percent down on a GTA rental does not guarantee the rent will cover the mortgage, property tax, insurance, and upkeep from day one.
Have a question while you read? I am one message away.
Enter your name and email and your PDF copy is ready to save, handy to take to your mortgage broker or accountant. This guide is free to read here, always. The download is just nice to have.
Thank you
Your copy is ready. Tap below to save it as a PDF, then take it to your mortgage broker or accountant.