Real EstateHome Improvement

Residential or commercial mortgage rate?

Is investing in rental real estate in 2023, a good idea?

Yes! Because if the health crisis has serious consequences for many economic sectors, the rental real estate market, for its part, promises to be more spared. It should continue to offer secure investment opportunities to its investors.

Certainly, the weeks of confinement have temporarily slowed real estate transactions… But not the desire to invest, many of whom have taken advantage of this period to develop or refine their real estate projects, both for rent and purchase. Especially with the prospect of changing your living environment for profit:

  • a quieter environment
  • a more comfortable interior surface
  • and access to the outside, even if it means moving away a little from the city.

We are only going to discuss a purchase of a building with 5 to 8 housing units when talking about commercial loan vs residential loan. Why 5 to 8? Because for a building of 4 or less you have to take residential financing. For a building of 9 or more units you must opt for commercial financing. In residential financing, the bank focuses on your personal financial situation while in commercial finance, the bank focuses on the profitability of the building. The important elements are the profitability and condition of the building, the net value of borrowers (at least 25% of the loan) and the credit rating.

The residential interest rate is a little lower and it is therefore advantageous at the beginning to take residential financing. Be careful to put too much importance on this point because interest is tax deductible. With each building purchase, your debt ratios will increase and over time you will be forced to take commercial financing.

The general principle is that a building of 5 or more dwellings is financed by the commercial. However, RBC accepts 5-6 residential homes. Once your housing stock exceeds 15 homes, the buildings will be financed commercially.

There are buyers who are not eligible for residential financing on the first purchase. Their personal debt ratio does not allow them to obtain personal financing for a fairly high mantant. I will take the example of one of my clients. He is a self-employed worker in a seasonal field. For residential financing, the bank gave him a pre-authorization letter for only $250,000. He could put a 15% down payment for a 6plex. His only choice was commercial financing.

As briefly mentioned in the first paragraph, even if the bank is primarily based on the profitability of the building and its state in commercial financing, it will also examine your personal situation. Yes, if you often pay your accounts late, the bank will wonder if you are able to manage a building well. In addition, it will probably require that your assets minus your debts be greater than 25% of the mortgage, or a minimum of $100,000. So if you are a tenant, and you don’t have a lot of investments and cash, it’s not worth bragging that you have a beautiful sports tank, your cat is dead. So look for a partner or a guarantor before looking for a profitable building.

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Real estate investment 2023: what trend for real estate rates?

For the past year, there has been a rise in mortgage rates, currently in the order of 2% on average for a 20-year loan.

Several elements can also explain this trend:

  • The increase in the key rates that leads banks to increase their scales;
  • The persistence of the inflationary situation;
  • The increase in 10-year bond rates, which serves as a milestone for banks to determine fixed rates on real estate loans.

However, it is interesting to note that this increase comes after a long period of bearish interest rates on real estate loans. Even with rising interest rates, the average solvency of households should be preserved. Whether you want to buy a home to live there or to make a rental investment, it is therefore time to finalize your project.

The growth of the real estate market is expected to continue, but at a slower pace. Prices are expected to grow at 3% in 2023.

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