When It Makes Sense To Pay A Mortgage Premium

By Peter Kinch

I received an email the other day from a non-bank lender offering fully discounted rates on rentals. Now normally, I wouldn’t think much about this, but ever since the sub-prime crisis of 2008 – 2009 the non-banks or mono-lines as we like to call them (Merix, MCAP, First National) have all cut back on the amount of loans they are offering to real estate investors and those that do still lend to investor clients most often charge a mortgage premium. 

So, as you can imagine, I was quite surprised to see that the rate was so low. Naturally, my first instinct was to wonder “What’s the catch?” Sure enough there was a catch – these lenders (not being deposit-taking chartered banks) have a stipulation that any rental property mortgages in their portfolio must have an additional insurance premium on them if they are in excess of 65% Loan to Value. In turn – you guessed it – they pass that premium onto the client. So that was the catch – you get a rate below 3% on a 5 year mortgage but you will have to pay an insurance premium if you need to borrow more than 65%.

This begs another question: If a real estate investor can get up to 75% or 80% financing at a chartered bank with similarly discounted rates and no insurance premium, why would they ever choose to pay the premium and go with a mono-line lender?

I sat down with my mortgage partners and we analyzed this question – and as it turns out, there are situations where it makes perfect sense to go with a mono-line lender and happily pay the insurance premium the same as you would pay CMHC insurance on a high-ratio mortgage on your house. Here’ is the list that we came up with:

Benefits of Mono-line Lending

• The number of chartered banks who offer fully discounted rates for rental mortgages up to 80% financing are far fewer now. So if a client cannot qualify at that lender or they have already exceeded their personal ‘CAP’ at that lender, then paying an insurance premium for 80% financing may be a better alternative to coming up with another 5%
• The rental rate at a mono-line lender will likely be better than that of a chartered and since the expense of the insurance premium is tax deductible, the saving on the interest may result in better cash flow – thus making it worth the initial cost. Keep in mind the premium can be amortized over the course of the loan.
• Many chartered banks no longer allow mortgages for investment properties to be in a company name (i.e. TD, National Bank). As such, your options for getting a mortgage in a company name are becoming fewer amongst the chartered banks, so a mono-line that allows a company name may be your only option.
• Chartered banks are making it increasingly more difficult to calculate a rental off-set, meaning it is becoming more challenging to qualify for a rental mortgage at 80% financing – depending on your income and the cash-flow of the property. Some mono-lines have the most aggressive rental off-set policies which may mean they are the only place you can qualify for 80% financing.
• Cap Space is always an issue. Every bank will have a ‘Cap’ as to the maximum amount of dollars or mortgages that they will lend to an individual. If you are planning to purchase more than 10 rental properties then you will need to learn how to manage ‘Cap Space’ and utilizing a mono-line early on in the process (even if it means paying a premium) may end up being the difference between qualifying for more properties down the road and hitting a brick wall. Poor management of your ‘Cap Space’ in an effort to avoid a relatively small, tax deductible insurance premium today could end up costing you tens of thousands of dollars down the road.

So what does all this mean to you at the end of the day? Like always, it pays to get the right advice and have a plan before you start. Don’t immediately dismiss a mortgage option simply because it comes with an insurance premium and alternatively don’t be quick to pay a premium if you don’t have to. Check with a mortgage planner who is looking at both your short and long-term goals and needs and approach it like you’re building a portfolio – because that’s exactly what you are doing. Sometimes the end justifies the means.

Peter Kinch is the owner of DLC Peter Kinch Mortgage Team and Co-Author of the #1 Best Seller “97 Tips for Canadian Real Estate Investors”.

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