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Investment properties: double down

You don't have to tell the average Canadian homeowner that real estate is a good investment. With very few exceptions, home equity has been building across Canada, and many Canadian homeowners have determined that two or more roofs are better than one. There are several reasons why a growing number of Canadians are purchasing investment properties:
1. Return on investment. Certainly, residential real estate is a solid long-term investment, typically appreciating faster than inflation. Even Canadians who have chosen their stock portfolio very carefully may find that their home is their best-performing investment. Many investment advisors recommend diversifying stock and bond portfolios to include real estate. Initially the goal is to have rental income cover all or most of the costs of the property. Over time the goal is to see an increase in the value of the real estate, with rent turning to profit once the mortgage is paid off. Expenses related to the property are of course tax deductible, offsetting the rental income
2. A pension plan for the future. Over the long term, an investment property or multiple real estate holdings can be a great source of retirement funds. Many Canadians do not have a pension plan, which means they need to take their own action to create sources of retirement income
3. A better alternative to student residence. Many Canadians are shipping off their university-age children, and housing them in an investment property purchased specifically for that purpose. They can save money on out-of-town accommodations for the student, and use revenue from other renting students to pay the mortgage and maintenance expenses.
4. Earlier access to a first home. For first-time home-buyers, a duplex or triplex can be a terrific way to get onto the home ownership ladder. Rental income from the extra units can help offset the cost of the mortgage as the new homeowners get on their financial feet.
Rules have changed however for investment property mortgages since the government's new mortgage rules that came into effect April 19, 2010. A minimum downpayment of 20% is required for an investment property i.e. you're not personally living in the property that you own, which is up from 5% prior to the new rules.  You can put down less than 20%, but you'll need to use an uninsured lender, which can mean higher interest rates. If you only have 1 to 4 properties, there are several CMHC lenders from which to choose from. Once you have more than 4 properties you need to start spreading out your business among several lenders so as to not reach the maximum number of mortgages a lender will approve per investor.
Other underwriting or qualifying rules have also come into play; Canada Mortgage & Housing Corp (CMHC), Canada's largest mortgage insurer, has changed the way they treat rental income in their debt service calculation, which can make qualifying more difficult.

Do I need an annual mortgage checkup?

A lot can happen in a year, especially during the "mortgage years", when we tend to be juggling many commitments in our busy lives. That's the reason why you should consider touching base with your mortgage each year.
Here are some of the common reasons why a mortgage may need some adjustment:
·       You're carrying some credit card or other high-interest debt that is eating away at your monthly cashflow and you are interested in consolidating this debt into your mortgage so you can pay less each month;
·       You're wondering if you can tap into some of your equity for a special renovation project to upgrade your home;
·       You're wondering if you can afford a vacation property, or are perhaps considering an investment property;
·       You're a bit concerned about a large expense looming in your future: for example, university tuition, a wedding, a leave from work, a new career or business, a big vacation or a new vehicle;
·       You're concerned with rising rates, whether to lock in or even break your mortgage to take advantage of today's amazing rates.

If any of these apply to you, then it would probably benefit you to take advantage of a mortgage checkup. There's typically no cost and no obligation. So what are you waiting for?  I'm doing one in December when my mortgage term will be compared against the next year's rate.