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Investing in rental properties is a popular strategy to earn passive income and grow wealth. However, there are operating costs that can eat into your profits. To maximize your rental property income, you need to minimize these associated costs. One way some rental property owners reduce costs — and even access additional funds — is by refinancing their rental property mortgage. 

Key Points

  • Refinancing your rental property mortgage will give you the opportunity to reduce your interest rate, lower your mortgage payments, cash out some equity, or extend your loan term.
  • The lending requirements for a refinance on a rental property may be more strict compared to refinancing the mortgage on your primary residence.
  • You’ll need good credit and at least 25% equity to refinance a rental property.

Can You Refinance A Rental Property Mortgage?

Yes, much like refinancing the mortgage on your primary residence, you can refinance your rental property. The process involves taking out a new home loan and using the money to pay off, or replace, your existing mortgage. Typically, refinancing is done to get better rates, access equity, or extend/shorten the amortization

Reasons You May Want To Refinance Your Rental Property Mortgage

There are many reasons you may want to refinance your rental property mortgage, including the following: 

Reduce Costs With A Lower Rate

One of the most common reasons for refinancing is to secure a lower rate. This may help you save thousands of dollars on interest and potentially repay your mortgage faster. It’s important to note that refinancing rates for rental properties are typically 0.5 to 0.75 percent higher than rates for a regular mortgage. 

Pay Off Your Mortgage Faster Or Lower Your Mortgage Payments By Changing The Term Length

Along with the rate, many rental property owners also change the length of their term. You could choose to shorten your term so you can pay off the mortgage earlier, or lengthen the term to lower your monthly payments. 

Cash Out For Extra Funds

As your rental income pays down your mortgage, you’ll be building equity in your property, which you can use to gain access to additional funds. Cash-out refinancing involves replacing your existing mortgage with a larger loan and taking the difference in cash. These funds can be used for almost any purpose, but it is recommended that you put toward increasing the home value such as rental property renovations. 

What Do You Need To Be Eligible To Refinance A Rental Property?

The requirements to refinance a rental property mortgage are generally harder than refinancing a regular mortgage. However, that’s not to say it’s impossible. In order to qualify, lenders typically require the following: 

  • Loan-To-Value (LTV) Ratio – The standard LTV ratio required by lenders is 75% or less. In other words, you’ll need to have 25% or more equity built in your home. If you decide to do a cash-out refinance, you’ll usually require a lower LTV ratio of 70%, which means you’ll need at least 30% equity in your property.
  • Credit Score – If you apply with an A lender, you’ll need a good credit score of at least 660 to qualify. Depending on the number of units in the house, you may need a higher credit score between 680 and 720. However, if you apply with a B lender, you may be able to refinance with a much lower credit score.
  • Debt-To-Income (DTI) Ratio – The DTI ratio takes both your income and debt into account and considers how much additional debt you can handle given your current income and debt obligations. In general, lenders require a DTI ratio of 44% or less.

Documents Required

  • Personal Identification – You’ll need to provide a government-issued photo ID, along with a copy of your title insurance to prove that you are the owner of the property.
  • Employment Verification – The lender may ask for your T4 slip as a form of employment verification. It is a document that contains a summary of your employment earnings and deductions for the year.
  • Income Proof – Lenders may also ask for pay stubs and/or bank statements to verify your monthly income.
  • Insurance Proof – You may also need to provide proof of home insurance to show that your property is covered.
  • Additional Financial Documents – Additionally, lenders will require documents that show your net worth. This includes documents on the assets, investments, and savings you own. Your net worth allows lenders to see how you’ll manage your payments.

Steps To Refinance Your Rental Property Mortgage

If you intend on refinancing your rental property mortgage, here are five steps you should follow to help you through the process. 

Step 1: Identify The Purpose 

When refinancing, it’s important to consider how exactly you want to refinance your mortgage and why. For example, if you want to take advantage of your home equity, you can choose to opt for a cash-out refinance by taking out a larger loan amount. 

You can make use of the surplus money to repair your rental property, pay property taxes, purchase a new property, and more. On the other hand, if you simply want to pay your mortgage off faster, you can refinance your whole mortgage to secure a lower rate and/or shorter term length. 

Step 2: Calculate All Costs

Before you opt for a mortgage refinance on your rental property, there are numerous costs to consider, including:

  • Prepayment penalties
  • Home appraisal costs
  • Registration fees
  • Legal fees
  • Closing costs

If you plan on switching lenders, you may also be charged a discharge fee. Be sure to calculate the total costs to see whether refinancing will save you money.   

Step 3: Evaluate Your Finances

Before applying for refinancing, evaluate your credit and finances to see if you’re eligible. As previously mentioned, you’ll need to meet certain requirements to qualify for refinancing. 

Moreover, in order to secure a low interest rate, your credit score and finances should be in good shape. If you’re currently struggling with poor credit, take the time to build it before applying by making full on-time payments and reducing your debt. You can quickly find out what your credit score is by using Loans Canada’s CompareHub tool.

Step 4: Compare Lenders and Rates 

Whether you want to refinance with your current lender or another, it’s best to shop around and compare costs. A mortgage broker or an online loan comparison platform can help you obtain quotes and find the best deals on the market. 

When choosing who to refinance with, it’s important to not only look at the costs but also take a closer look at the lender. Finding someone that you trust and that has a good reputation is important, as you’ll be dealing with them for a long time. 

Step 5: Refinance Your Property

Once you find a reliable lender to refinance with, simply fill out the paperwork and provide all the documents necessary for the underwriting process. During this underwriting process, the lender may require an appraisal to verify your property value. This can take about a week to complete. 

If you’re approved, you’ll have to sign the contract to seal the deal. Be sure to review the details to ensure it’s what you agreed upon. 

Once the agreement is settled, your lender will require all the upfront payments such as the closing costs. Then, you’ll be officially “refinanced” and you may continue your renewed mortgage payments.

Factors To Consider Before Refinancing Your Investment Property Mortgage

Before you refinance the mortgage on your investment property, consider the following things first: 

Current Market Conditions 

Assess today’s real estate and mortgage market. Look at things like current interest rates, inflation, the temperature of the housing market, and other related factors. For instance, are rates higher or lower today than what you’re currently paying? Such factors can impact whether a refinance on your rental property makes sense or not.

Your Rental Property’s Financial Profile

Find out what your property’s current value is, your current investment property cash flow, and your current loan balance. These factors will determine not only your ability to get approved for a refinance but will also play a role in how much equity you may be able to access. 

Should You Refinance Your Rental Property Mortgage?

If done right, refinancing your rental property mortgage can help you save on interest, lower your monthly payments, pay off your mortgage faster, or help you gain access to cash. Keep in mind that the fees associated with refinancing can be very expensive and may easily outweigh the savings. If you plan on refinancing, be sure to calculate the costs and savings associated with it to see if it is worth it.

Frequently Asked Questions

Do I have to pay capital gains taxes when I refinance my rental property mortgage?

No, you won’t have to pay capital gains taxes when refinancing your rental property mortgage. Since you’re not selling your property with a refinance, there are no gains realized. Instead, refinancing simply involves taking out a new mortgage to replace an old one with no sale involved and no profits collected. So, there’s no taxable income involved and therefore no capital gains taxes to pay.

How long will it take to refinance my rental property mortgage?

The process to refinance a mortgage on a property typically takes anywhere from 30 to 45 days.

Do I have to undergo the mortgage stress test when I refinance?

Yes, you will have to be mortgage stress tested again when you refinance your mortgage. That’s because your lender will want to make sure you can handle higher mortgage payments if interest rates increase or your income dips.

Can I use my rental income to qualify for a refinance?

Yes, your lender will consider your rental income when you apply to refinance your rental property.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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