Everything you need to know about rental property loans

If you decide to take the plunge and invest in real estate, you should know that the criteria for obtaining a loan for a rental investment differ from those applied to purchasing a primary residence. This article details the criteria banks use to grant such a loan and how to maximize your chances of securing one.

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How does rental investment work?

When you buy a property to rent out, the bank lending you the money does not use the same criteria as it would for the purchase of a first home. Indeed, when investing in real estate, your expenses increase, and the bank anticipates this with criteria that are sometimes more rigorous.

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The bank takes 70% of your rental income into account

Every investment carries risks, and real estate is no exception. Between vacancy periods and the risk of unpaid rent, you cannot guarantee the bank that you will have consistent and very regular income, even with rental default insurance. To protect themselves against these risks, banks only factor in 70% of your projected rental income.

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When putting together your application, you can either include rental income with your total income or deduct it from your expenses. Banks generally set a maximum debt-to-income ratio of 33%. However, if you exceed this rate, all is not lost. Other factors can work in your favor when building your profile. If you already own your primary residence, this is viewed favorably by banks.

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Getting a loan without a down payment?

Although rare, it is not impossible to obtain a mortgage without a down payment for a rental investment. In this specific case, being a homeowner already can be a significant advantage in reassuring the bank.

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You could also take advantage of beneficial legal provisions. When you are taxed under the actual income regime, you can deduct your loan interest from your rental income. All your rental management fees and condominium charge provisions can also be deducted.

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What about 25-year loans?

The profitability of your investment depends on the repayment term of your mortgage. The lower your monthly payments, the more cash flow you have available to handle potential unpaid rent or vacancies. It is therefore preferable to opt for a long-term loan. However, not all banks are willing to grant a 25-year loan for a rental investment.

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Are real estate rates sometimes higher?

As mentioned above, banks view rental investment differently.

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If a property struggles to find tenants, the owner can quickly find themselves in financial difficulty. Between the expenses for their primary residence and those for the vacant rental property, they could face loan repayment issues. For these reasons, some banks are more hesitant about these projects. They sometimes compensate for these risks with less favorable rates. In most cases, however, the reasons you are offered higher rates are simply due to your borrower profile, most often a lack of a personal down payment.

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What reduces your chances of getting a loan?

Not being a homeowner before a second loan

Being a homeowner before borrowing for your rental investment says a lot about your profile. For the lending institution, it is proof that you have successfully completed a first real estate project, making you appear more reliable. However, many young professionals decide to invest before buying a primary residence. It all depends on the viability of your project. If your profile is solid and your application meets the banks' criteria, your project can move forward. Next, run a simulation of your borrowing capacity and then contact a mortgage broker.

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Optional income domiciliation

Optional professional income domiciliation complicates the approval of rental property loans. For the purchase of a primary residence, banks often require the domiciliation of income as a condition. For rental real estate, however, domiciling your rental income with the lending bank is sufficient. But the reduction in such requirements does not encourage banks to offer more favorable rates.

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How to maximize your chances of getting this loan?

Clearly define your project

It is essential to think through your real estate project before taking action. Ask yourself the right questions. Is this a property you plan to live in later? Is it a property intended exclusively for rental? The answers to these questions will help you choose your property.

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Also, define your budget while taking your financial situation into account. Target a specific area that is attractive in terms of employment and education. Study real estate prices in that area and make your choice. Don't forget to identify your target tenants. Different types of tenants have different housing needs.

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Get help from a professional

To maximize your chances of getting a loan, it is best to go through a mortgage broker. In just a few minutes, they provide you with access to all the mortgage offers on the market to find the one best suited to your project. This saves you from spending entire days visiting banks to negotiate your loan. But that's not all; they negotiate your rate and borrowing terms for you, which can save you thousands of euros on the total cost of your purchase. By using an online mortgage broker, you will also benefit from other advantages: reduced brokerage fees, remote tools, and more. So don't hesitate to take the leap and run a mortgage simulation with Pretto.