Canadian Mortgage Trends for 2013 Investors need to know

Canadian Mortgage Trends for 2013 Investors need to know

new mrtg rulesIn my last newsletter, we discussed how the changes to the rules and policies for Canadian mortgages and bank lending guidelines are making it more difficult for real estate investors to obtain mortgages.

This month, I want to follow up and provide my thoughts on Canadian Mortgage Trends for 2013.

Changes to Financing Rules – 2012 – Year in Review

flahertyIn June, the Finance Minister announced the fourth cycle of changes to financing rules. Rules around mortgage financing and bank lending guidelines in Canada continue to squeeze investors and the industry alike.

According to Canadian Association of Accredited Mortgage Professionals (CAAMP) chief economist, Will Dunning, these changes are starting to impact the broader economy.

The key change to CMHC rules relates to cap the maximum amortization period to 25 years. As it continues to roll out, there is no shock that the less amount of time you have to pay back the loan, impacts both the size of the mortgage and the affordability of the investment.

For real estate investors who purchase investment properties, conventional mortgage changes are expected to follow suit. Lenders will be looking self-employed business owners to have 35% down payment. This trend will become more prevalent and wide spread in 2013.

In addition, the banks have made it even more difficult for investors who wish to purchase properties in company names and some lenders are no longer financing investment properties in company names at all.

A mortgage broker associate shared that he has also seen indications that for self-employed investors, other mortgage rule changes may include a 35% down payment requirement for all rental properties and investors can still get regular residential financing up to a maximum of six investments. For any investor, the seventh property investment, the financing might have to go through commercial lending qualification and program.

Mortgage Trends for Canadians – 2013

1. Market Correction in the Canadian Market

Market correctionIn the media, we hear about a possible “bust” in the real estate market similar to our American neighbours. Headlines point to record levels of Canadian household debt – adding to the levels of concern.

Although Canada’s household debt appears to be getting worse, the sudden jump in percentage in debt was not a result of Canadians increasing their debt suddenly. In reality, the ratio of household credit-mortgage debt to disposable income appears poorer due to revisions made to the methodology in calculations.

When we look closer, the Canadian real estate markets are very different to our neighbours in the south.

According to a report from CIBC’s Deputy Chief Economist, Benjamin Tal, Canada is just not going to have a severe crash.

The quality of the debt is much different here,” says Mr. Tal. People who are taking on debt are in a much better position financially, with higher credit scores than American home owners.

Similarly, the percentage of Canadian investors who choose a variable mortgage rate is much lower. According to Canadian Association of Mortgage Professionals, 70% to 80% of Americans invested in variable mortgages at the peak while the Canadian figure is 29%.

In my opinion, we may see a shift in housing prices over the next couple of years, but it will not compare the American housing market of 2006 – 2008. CMHC’s Housing Market Outlook report is indicating a stable housing market in 2013. According to the report house prices will remain flat while rental vacancy rates will stay low.

2. Continuing Mortgage Changes

Tightening lendingInvestors are experiencing greater challenges in qualifying for mortgage financing. This trend will continue in 2013 as we see the following possible changes coming down the pipeline:

  • Most lenders will be requiring a 35% down payment for self employed
  • Equity programs now require 35% down
  • Some lenders are even asking 35% down for rental purchases
  • Rules for qualifying on terms less than 5 years or variable rate mortgages have become more stringent too.
  • Further tightening lending restriction on approvals for properties purchased through a company

Major lenders are trying to fit all investors in little financial boxes. With less reviewing on a case by case basis, the approval of mortgages resembles more of an assembly line process. Simply put, if you don’t fit within the guidelines, you don’t get approved.

Earlier policies that increased the borrowing power for investors have created higher debt levels. For some, this resulted in many people to overextend themselves financially by borrowing through the equity of their homes. Now, with the recent changes, these policies are being reversed.

While I appreciate that we need to be smart about our borrowing, the bottom line in my and many people’s opinion, the regulators are going after the wrong things. Regulators have focused on and over reacted to a situation of higher homeowners mortgages (the symptom) instead of the consumer debt (the disease).

In any case, these changes will have a wide sweeping affect and for real estate investors, the more prepared you are the better.

With these possible changes in mind, using a professional mortgage broker to locate and secure financing makes sense. The Bank of Canada has revealed “borrowers who use a mortgage broker pay less, on average, than borrowers who negotiate with lenders directly”. I encourage my clients to do their research. In the end, the right financing can save you thousands of dollars.

3. Required Lease Agreements for Investment Properties.

Lease Agreements becoming required for financing investment properties. More and more lenders are requesting a lease agreement earlier to the completion of financing.

Historically, lenders have used economic rent from an appraiser as verification, based on market rents for a property. Moving forward, banks are concerned about higher vacancy rent in smaller markets. In order for lenders to protect themselves, they will be asking for both economic rents from an appraiser and a lease agreement.

National Bank, TD and First National and many of the other major lenders have all changed their guidelines for rentals.

Banks are requesting copies of actual leases ahead of approval and not just economic rents from appraisers as they used to in the past. If the client is on a month to month rental agreement, some lenders are requesting the month to month letter that needs to be signed by the tenant, property manager, purchaser and vendor or else they require a new lease.

For investors, ask your realtor to obtain copies of the existing tenancy agreements. Unless it is in the contract, bear in mind that you may be able to view but not retain a copy of the lease until you are firm on the deal due to privacy concerns. If there is no tenancy in place, it is best to get a lease in place as soon as possible. It will reduce further complications down the track.

Final Thoughts

Securing financing will continue to become more involved. The new financing rules may make the purchase of your next investment more difficult. As I mentioned last month, working with professional broker and being prepared will minimize delays and difficulties. I work with several mortgage brokers that focus mainly on investors and have relationships with A and B lenders.

By Andrew Schulhof
20 Dec 2012