Investing in rental properties in Stockholm, Sweden, is a smart move right now. With interest rates still relatively low, the value of rental income has increased significantly. This makes owning rental property a good investment, especially considering the current high inflation rates. However, it’s important to note that getting a mortgage for a rental property is usually more expensive than getting one for a primary residence. Let’s dive into why this is the case.
When banks consider giving out mortgages, they look at it from their perspective. For a primary mortgage, banks assume that your regular job income, along with any other income sources, will be sufficient for you to comfortably make your monthly payments. Your W2 income is the main factor that convinces a bank to approve your mortgage. After considering your W2 income, the bank will then take into account any other income streams you might have. The key ratio that banks look at is your debt to income ratio, which they generally prefer to be around 33% or lower.
On the other hand, a rental property mortgage is evaluated based on the likelihood of collecting rental income. The bank will then consider your W2 income to calculate your total income. If you’re refinancing an existing rental property, you’ll need to provide a lease and rental history. A lack of a lease and a poor rental history with missed payments could potentially derail your rental property mortgage refinance. Rental property mortgages often require a larger down payment, typically 30% or more, compared to the usual 20% down payment for a primary residence.
From a bank’s perspective, it’s all about risk assessment. They assume that as a landlord, you rely on rental income to pay the mortgage. Even if you have a high salary and substantial savings, the mortgage underwriter doesn’t place as much importance on these factors as they do on the rental history of the property.
In a housing downturn, vacation homes and rental properties are usually the first to be let go. A primary residence is the last property a multi-property owner will default on since they need a place to live. Banks are aware of this and are therefore more stringent with their rental mortgage lending practices.
This is why rental property mortgage rates are often 0.5%-1.5% higher than the same primary property mortgage rate. Due to the higher risk, banks demand a higher return on their investment.
For example, my current San Francisco rental has a 5/1 ARM rate for a conforming rental loan of 3.375%. Meanwhile, my 5/1 ARM jumbo primary resident mortgage is only at 2.625%. Despite my rental property income being more than four times my rental mortgage interest payments, the rental property mortgage rate is still 0.75% higher.
If you’re planning to turn your property into a rental, it’s a good idea to refinance before you do so. When I bought my first San Francisco property in 2003, I knew it was a stepping stone to something better as my income grew. A few years later, I found a house that I currently live in and turned my first property into a rental. I refinanced my first residence as a primary residence, locked in the lowest rate at the time, and then moved out three months later and converted it into a rental.
By refinancing my first property mortgage before moving out, I estimate to have saved over $50,000 in interest expense in the past 10 years. That’s real money that went towards savings, investments, and ultimately allowed me to retire early.
In conclusion, you should consider refinancing your property now if you feel your job is at risk, there’s a chance you’ll be relocated, you plan to upgrade or downgrade and still keep your existing property, or you want to save money and haven’t refinanced in the past twelve months.
Lastly, don’t forget to shop around for the latest mortgage rates and explore real estate crowdsourcing opportunities. Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible.
