“Unless a property is sold, all mortgages renew,” explains Butler. In other words, for now, the mortgage on your Airbnb property is likely safe as long as you continue to own it. However, Butler says, “some lenders may choose to start implementing a review of properties upon renewal. A simple search can show whether or not a property has been rented out on a short-term basis, [and] as soon as a lender finds that your property is being used as a short-term rental, they can choose not to renew your mortgage.”
At this point, the owner has two choices:
- Be honest about the use of the property; or
- Lie about the use of the property.
Let’s assume that, as the property owner in this situation, you choose to be honest. On this path, you’ll quickly learn that lenders won’t approve a residential mortgage for a property that is being used for commercial reasons—and using your former home as a rental investment constitutes a commercial venture.
But hang on a second, you say. My uncle Freddie, owns a triplex that’s always rented out—why does he have a “regular” mortgage?
Turns out lenders look at longer-term leases differently from Airbnb-style rentals.
“Lenders don’t feel comfortable with assessing the cash flow on a short-term rental,” explains Butler. “But a lease for a specified period of time is pretty straight-forward and easy to understand. Plus there’s no hot season or dry spell [with the risk of no rental income to fund mortgage repayments] to contend with.”
Being forced to shop around for a mortgage through a commercial lender can add a whole new dimension of difficulty to the financing process.
For instance, a residential mortgage typically closes relatively quickly—usually within a week or two. Approval on a commercial mortgage application, however, takes much longer—anywhere from 60 to 365 days.
Plus, commercial mortgage rates are much higher than residential mortgage rates. At present, a 5-year fixed residential rate hovers around 3%. A commercial 5-year fixed mortgage sits closer to 6.5% (although, you may be able to find 5.95% if you shop hard). For most budget-conscious homeowners that 300-basis-point jump will really add up and could quickly erode any money earned from using your property as a short-term rental.
Playing devil’s advocate for a moment, let’s look at what would happen if you opted to lie about the use of your short-term rental property.
Initially, this seems like relatively simple fib, with little consequence, but don’t be fooled.
“If you knowingly provide false documents to back-up your claims a lender can flag your account,” says Butler, “and send it to the shared fraud database.”
Once you’re in this database, which is known as Citadel, you are “severely restricted in your ability to get a mortgage,” says Butler. “Eventually, if you have enough equity in the property you’ll get a mortgage, but it will have to be through private lending with very, very high rates.”
We’re talking a mortgage rate of 10% or greater, depending on the situation.
How to protect yourself and your extra income
The best way to protect yourself is to be honest and upfront, and to live in the property you choose to rent out casually as short-term, temporary accommodation.
While you’ll probably have to pay extra for insurance, as well as consider the implications it will have on your annual taxes, from a financing standpoint you’re in a good spot.
The real difficulty lies in the properties that are not owner-occupied and used as short-term rental income generators.
“There are even developers advertising how easy it is to Airbnb their condo units,” says Butler, “some of which are built without a stove!”
The reality, however, is that lenders aren’t prepared to take on this financial risk and, as property investors, you need to realize how dangerous it can be to leave yourself exposed.
One way around this dilemma is to purchase a real estate investment property that has at least two units; that way, you can rent out one unit to a tenant with a lease and keep the other as an Airbnb or short-term rental suite. At the very least, lenders will consider the loan application as a residential mortgage and this enables the you to avoid the high cost of commercial mortgages or the exorbitant private lending rates.
Work with a mortgage broker or agent who is familiar with loan applications that include short-term rental income declarations. Also, become familiar with how lenders classify commercial properties (some lenders consider four or more rental units to be a commercial property, while some classify a property with five or more units as commercial). Remember, lenders like it when borrowers earn extra income (they’ll even take a portion of that income and use it to reduce your debt ratios)—but only if that income is generated in a stable, reliable manner.
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