Investment property mortgages in Nova Scotia

Two different files, one question

Lenders and insurers do not ask “is this an investment?” They ask “will the borrower occupy it?” The answer sorts every one- to four-unit purchase into one of two rule sets, and the arithmetic below follows each of them on the same property.

• You will not live there. Since April 19, 2010 the federal rules have required a minimum 20% down payment for government-backed insurance on non-owner-occupied property, which in practice means the mortgage is written uninsured at 80% of the price or less. No CMHC premium, lender-set rates, and the lender’s own rental-income policy.
• You will live in one unit. CMHC treats a two-unit home the same as a house: up to 95% financing, 5% of the first $500,000 and 10% of the remainder (1–2 units). Three and four units, owner-occupied, go to 90%, so 10% down. The premium is added to the mortgage, the price must be under $1,500,000, and the amortization caps at 25 years.

The same duplex, both ways

A $400,000 two-unit property, deed transfer tax at Halifax’s 1.5% (most Nova Scotia municipalities match it; a few charge 1.0% or 1.25%), and the typical legal, recording, certificate and title figures the rest of this site uses.

The gap in cash is $60,000. The trade is the premium, a larger mortgage, and the obligation to actually live there at purchase. Many first rentals in Nova Scotia start as the second route — buy the duplex, live in one side, move on later — because the occupancy rule is about the day you buy, not forever.

How the rent counts

Rental income is used one of two ways. An add-back takes a percentage of the gross rent and adds it to your income before the debt-service ratios are run. An offset takes a percentage of the rent and subtracts it from the property’s carrying cost instead, which usually helps a tight file more. On an insured, owner-occupied purchase the percentages are CMHC’s: up to 100% of gross rent on a duplex, up to 50% on three or four units, with the whole payment counted in the total debt service ratio.

On an uninsured rental each lender sets its own percentage and its own method, and none publish them. That is the difference between a file that qualifies and one that does not, and it is the reason the same duplex can be a decline at one lender and an approval at another. Bring the lease, or a realistic market rent with the comparable listings, and the right lender can be chosen before the application is written rather than after.

Two more things lenders want on any rental: the down payment shown as your own or gifted money, not borrowed, and the existing rentals you own already carried at the stress-test rate with their own rent treated the same way.

Stress test and ratios

Every federally regulated lender qualifies the mortgage at the greater of the contract rate plus 2% and 5.25%. GDS and TDS are tested after the rent is added or offset, and the rule of thumb is that a rental which only carries itself at the contract rate does not qualify. CMHC’s caps on an insured file are GDS 39% and TDS 44%; uninsured lenders use the same neighbourhood. A pre-approval that states the rate it was stressed at →

What lenders ask about Nova Scotia small multi-units

• Legal units. A lot of Nova Scotia two- and three-unit houses are conversions. The appraiser and the lender want the units to be legal — fire separation, egress, and where the municipality requires it, a permit history. An unpermitted basement suite is usually treated as a single-family home for lending, and its rent may not count.
• Separate services. Separate power meters and heat sources make the rent easier to prove and the operating expenses easier to model. One oil furnace heating three units is a number the lender will want explained.
• The usual Nova Scotia conditions. Oil tanks, wood stoves without a WETT report, knob-and-tube wiring and well and septic outside municipal services apply to a rental exactly as to a home, and insurers are stricter on tenanted property. The full list, on the purchase page →
• The tax bill after you buy. Nova Scotia’s capped assessment resets to market value on sale, so the seller’s property tax is not your property tax. On a rental that goes straight into the operating expenses the lender models. How the cap works →
• Tenancies in place. Existing leases carry over under the Residential Tenancies Act. The lender will want them in writing, and a unit you intend to occupy has to be one you can lawfully occupy on closing.

Five or more units

Four units is the line. Five and up is commercial lending: different lenders, CMHC’s MLI Select program instead of homeowner insurance, and underwriting on the building’s income rather than yours. That work lives at Indi Mortgage Commercial Division, where Riley also advises on apartment and mixed-use financing. If you are looking at a fourplex with a fifth unit in the basement, ask before you offer — the line is not always where the listing says it is.