New Mortgage Rules for Investment Property in Canada, Down Payment Requirements go up

Mortgage Rules & Down Payment Requirements in Canada for Investment Properties

We’ve been talking a lot recently about CMHC’s new changes to mortgage rules and down payment requirements for investment property.

This morning, the Globe and Mail has a story that I’ll file under “Ya Right…”

Limited impact seen from mortgage rules

Ottawa’s tougher mortgage rules have sparked a rush by home buyers to get in before the new regulations take effect Monday, but may not dampen the real estate market to the extent observers believed.

“When the new mortgage insurance rules were announced, there was widespread expectations that this could help to cool the market,” said Toronto-Dominion Bank economist Craig Alexander. “But the true impact should prove limited.”

The rule that was expected to have the most widespread effect says all borrowers must meet the qualification standards for a five-year fixed-rate mortgage, even if they choose a variable-rate mortgage or one with a shorter term.

Wrong – the change that will have the biggest impact is that CMHC is now making real estate investors put down 20% on an investment property (up from 5%), meaning many prospective property investors will not be able to get into the market.

The government designed the new rule to help ensure that homeowners will be able to afford their mortgage payments when interest rates rise. Rising rates are less of a worry for a borrower who has locked in for five years than for those who have three-year mortgages.

“The government stressed that the rule changes were not to deflate the housing market, but rather to diminish speculation and provide greater incentive for buyers to take mortgages that were less vulnerable to rising rates,” Mr. Alexander said.

I think the change to the mortgage rules that the article talks about – making people be able to afford the fixed rate 5 year payments, even if they take a variable rate mortgage – is a good thing for most people.

The bad changes are the ones not mentioned here.

As Robert McLister said this morning on twitter ““The true impact [of the new mortgage rules] should prove limited,” says TD. Yeah…as long as you don’t need a variable or rental mortgage.”

For questions about the current real estate market in Kitchener Waterloo, call me now at 519 772 4376, or email me at Benjamin@BenjaminBach.com

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New CMHC Mortgage Rules for Real Estate Investment Properties

CMHC Mortgage Regulations to Restrict Real Estate Investment

Originally posted by Benjamin Bach, the Wealth Team on 06. Mar, 2010 in Featured Articles, Real Estate Investment { Edit } 

I’ve been hearing rumours recently that CMHC was changing their financing criteria for real estate investment properties.

Over the last couple of weeks,we’re heard about raising the minimum downpayment (New Mortgage Rules for Real Estate Investment in Canada) that an investor would need to put down on a rental property (that wasn’t owner-occupied, meaning the owner or a close relative was living there), and that rates will be heading up come July 2010 (Interest rate updates from a mortgage broker).

This week I’ve learnt that CMHC is also likely planning to, effective April 19, 2010, change things a whole lots more.

Rental Offsets

Currently when you buy a rental property, CMHC will allow you to use a 80% rental offset, which means that they used to take 80% of the gross rental income that the income property generated, and subtract that from the borrowers total debt, to establish the total debt service (TDS) ratio. 

What that means is that you don’t have to have the household income to cover 100% of the value of the rental property, like you do with a home you live in, because the bank will let you offset the debt using 80% of the revenue the rental produces (does that make sense?).

They’re tentatively changing this amount to 50%, which makes it much tougher for people to qualify for investment properties, but the real kicker is that…

CMHC is also changing how they evaluate the current debt and income on your existing rental portfolio – they are treating the rental income here the same as other non-salaried income too, meaning your current portfolio, while it generates cash flow every month, might hinder the growth of your portfolio going forward.

We also think that most lenders are going to adopt these standards, even for non high ratio loans that are not CMHC insured, just to be cautious.

Bottom Line

If you qualify under today’s standards for a loan for 1 or 2 townhouses that you planned to rent out and hold as long term assets, come april 19, you may no longer qualify for them.  Let’s talk before then so you know all of your options.

PS – if we have an agreement of purchase and sale (a real estate contract) dated before april 19, and the mortgage is approved, the rental property can close after (they may set a timeframe, contact me for full details).  You don’t have to complete the purchase by april 19, just have the contract written and accepted.

If you’d like to talk to a mortgage broker to explore your options, I can recommend one who does a lot of work with real estate investors.

Leave me a comment below with any questions, and please contact me for more information at 519-772-4376 or via email at Benjamin@BenjaminBach.com.

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Tags: CMHC, financing, government policy, kitchener waterloo, mortgage rates, mortgage terms, new loan, qualify for a mortgage, rental offset, rental property

New CMHC Mortgage Rules

New Mortgage Rules for Real Estate Investment in Canada

by Benjamin Bach, the Wealth Team on 16. Feb, 2010 in Real Estate Investment { Edit }

I want to pass along a few articles my friend Jeff Zabel, with Mortgage Alliance in Kitchener Waterloo emailed to me.  They are about changes to the mortgage rules, and will affect real estate investors and anyone buying Kitchener Waterloo investment properties:

This morning Finance Minister Jim Flaherty made the following three announcements to mortgage insurance rules

1. Variable mortgages qualified at five year fixed rate;

2. Refinancing limited to 90% instead of 95%;

3. Non owner occupied residences [I read this as single family properties bought for rental purposes -BB] require 20% down payment;

This announcement is the result of a review process on debt levels undertaken by the federal government that CAAMP has been actively engaged.  We released Will Dunning’s debt report, consulted with members  and took a position with decision makers in Ottawa that while we opposed changes to the current 5% down payment rule and 30 35 year amortization rates for primary residences, we were open to other changes if the government deemed there to be a problem.  The changes announced this morning reflect CAAMP’s position and do not affect primary mortgages except for the first point where many lenders are already qualifying at 5 years anyway.

Jeff is being told that these rules will be effective april 19th, 2010, so we may be able to still take advantage of the current terms and rates if you’d like.  Contact me for more information regarding that.

Jeff also sent me this article from the Canadian Press, which came out before the initial announcement, so it contains speculation, not fact:

New mortgage rules introduced to lessen mortgage crunch risks: sources say

By Julian Beltrame, The Canadian Press

OTTAWA – The federal government is expected to announce new rules Tuesday that would make it more difficult for first-time buyers to enter Canada’s hot housing market.

Sources have told The Canadian Press that Finance Minister Jim Flaherty is ready to move on the issue because of concern Canadians may be taking on too much debt.

Economists have advised the minister the best way to protect Canadians is to institute a debt affordability test in order to qualify for a Canadian Mortgage and Housing Corp. insured mortgage.

Currently, prospective home owners can qualify for a CMHC insured mortgage if they put at least five per cent down on the cost of a home.

But bank officials say they usually apply a cushion to ensure home buyers have sufficient income to meet payment requirements if floating rates rise, in some cases by more than two percentage points.

Flaherty is expected to make such an income test a condition for acquiring an CMHC insured mortgage.

Another possibility is for the minister to reduce the amortization period from 35 years to 30, which would have the effect of raising monthly payments. [note: it does not appear this happened -BB]

It is believed Flaherty rejected more radical measures to cool the housing market, which has reached record levels in sales and near record levels in average home prices despite the weak economy.

Economists have cautioned the minister against putting on the brakes too strongly. They say raising the minimum downpayment requirement to 10 per cent, one of the suggestions given the minister, could cause a crash in a key mainstay of the fragile economic recovery.

The Bank of Canada has been warning for months that homeowners should ensure they can absorb an increase in their floating rate mortgages once rates start rising, likely as early as this summer.

By the central bank’s own stress test calculation, almost one in 10 households would have a debt-service ratio that makes them vulnerable to economic shocks by the middle of 2012 if current trend continue.

In an address written for deputy governor Timothy Lane last month, the bank suggested the government has all the tools it needs to address the problem.

“An array of supervisory and regulatory instruments can be used by the government to restrain a buildup of systemic risks,” said notes the address.

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Want to Invest in Kaufman Lofts in Kitchener?

…here is some information you’ll need!

A real estate investor recently asked me why people like buying condos at the Kaufman Lofts in Kitchener, Ontario

Between the terrific location (across from the new Health Sciences campus at the corner of King and Victoria St in downtown Kitchener), the iconic nature of the property – Kaufman Footwear has been there since the early 20th century – and the premier rents the condos generate, they can make a great real estate investment.

Along with desireable addresses like the Bauer Lofts and 144 Park in Waterloo, Kaufman Lofts are a premier building in the region. 

Click Play to watch the video. This looks at the reasons investors like buying condos here, and goes through the potential cash flow that the rental unit can generate.

Let’s assume a real estate investor is looking at a 1 bedroom condo here. There are units available around $180,000 – a unit at this price is amongst the smallest available, but still in demand by buyers and tenants alike.

(These figures are all projections. Contact Benjamin for a personalized consultation)

The sheet above (click to enlarge it) shows us the assumptions we’re using:

$1200 a month in rent

$3000 condo fee and $1700 in property tax annually etc.

It also shows us the mortgage options – this investor is using a 20% downpayment, and getting a 80% LTV (Loan to Value) mortgage.

Now let’s look at the cash flow (click to enlarge):

As we can see, a Kaufman Loft can generate a positive cash flow for a real estate investor, based on these figures.

Over 20 years, what will your return on equity be? Let’s look at another cash flow projection:

Click to enlarge

For more information on Kaufman Lofts and other condos in Kitchener, contact Benjamin Bach @ Benjamin@BenjaminBach.com, or call me at 519-772-4376

Why do Real Estate Investors like the Kaufman Lofts?

by Benjamin Bach, the Wealth Team on 10. Apr, 2010 in Featured Articles, Real Estate Investment, kitchener waterloo { Edit }

A real estate investor recently asked me why people like buying condos at the Kaufman Lofts in Kitchener, Ontario 

Between the terrific location (across from the new Health Sciences campus at the corner of King and Victoria St in downtown Kitchener), the iconic nature of the property – Kaufman Footwear has been there since the early 20th century – and the premier rents the condos generate, they can make a great real estate investment. 

Along with desireable addresses like the Bauer Lofts and 144 Park in Waterloo, Kaufman Lofts are a premier building in the region.  

Click Play to watch the video. This looks at the reasons investors like buying condos here, and goes through the potential cash flow that the rental unit can generate.
A real estate investor recently asked me why people like buying condos at the Kaufman Lofts in Kitchener, Ontario 

Between the terrific location (across from the new Health Sciences campus at the corner of King and Victoria St in downtown Kitchener), the iconic nature of the property – Kaufman Footwear has been there since the early 20th century – and the premier rents the condos generate, they can make a great real estate investment. 

Click Play to watch the video. This looks at the reasons investors like buying condos here, and goes through the potential cash flow that the rental unit can generate.
 

Let’s assume a real estate investor is looking at a 1 bedroom condo here. There are units available around $180,000 – a unit at this price is amongst the smallest available, but still in demand by buyers and tenants alike. 

(These figures are all projections. Contact Benjamin for a personalized consultation)
 

 

The sheet above (click to enlarge it) shows us the assumptions we’re using: 

$1200 a month in rent 

$3000 condo fee and $1700 in property tax annually etc. 

It also shows us the mortgage options – this investor is using a 20% downpayment, and getting a 80% LTV (Loan to Value) mortgage. 

Now let’s look at the cash flow (click to enlarge): 

As we can see, a Kaufman Loft can generate a positive cash flow for a real estate investor, based on these figures. 

Over 20 years, what will your return on equity be? Let’s look at another cash flow projection: 

Click to enlarge 

For more information on Kaufman Lofts and other condos in Kitchener, contact Benjamin Bach @ Benjamin@BenjaminBach.com, or call me at 519-772-4376 

Share and Enjoy:

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Market Update for Kitchener Waterloo Real Estate MLS

 Monthly/Yearly Kitchener-Waterloo Real Estate MLS Stats for March 2010 – Residential KW real estate sales UP 47.1% and 52.3% for the year.

Best March EVER with 731 homes sold in Kitchener Waterloo

Click play to watch:
Days on market is down from 55 to 43 for the year.

Sales to active ratio 25.8% was 16.2% in 2009, meaning 1 in 4 listed homes is selling each month, or that we currently have a 4 month supply of listings.

Sales$ to list$ ratio was 98.4% – it was 97.7% 2009. That means that the average home for sale in Waterloo ended up selling for 98.4% of the price it was listed for – so on average, a home listed for sale at 200K is selling for $196,800

Average sale price for a detached home is up 14.2% to $322,974 for the year.

Average sale price for a semi-detached house in Kitchener Waterloo is also up 6.1%, to $213,602 for the year.

Average sale price for freehold townhomes down 8.9% to $228,768 for the year.
New listings up 23.2% for the month to 1133 and number of listings for the year 2892 is up 13.5%.

In terms of the Condo market in Kitchener Waterloo, there were 117 condos sold in march, (MLS areas 1,2,3 & 4), a 51.9% increase from march 2009

Why has March been so busy?

It’s a good question, and I think there are two main reasons, relating to the way you can finance properties.

1) New CMHC Mortgage Rules

-As of April 19, people will now have to be able to qualify for a more expensive fixed rate loan, even if they choose a variable rate.

-The new mortgage rules in Canada (see: How will CMHC’s new mortgage rules impact real estate investors in Canada?) that is having the biggest impact, I think, is that Real Estate Investors will have to put down (in most cases) 20% per rental property, whereas now that minimum downpayment rate is 5%. Investors looking to get into the market may be rushing to do so before the rules change

2) Interest Rates Going Up!

I love cheap money, but rates have nowhere to go but up (and that’s actually healthy for our economy). People know that if they buy a house in 6 months, and rates have gone up, that home will cost them more money, even if the price is the same,

If you have any questions about the Kitchener Waterloo Real Estate market, contact me at Benjamin@BenjaminBach.com or 519 772 4376