Remortgaging/Refinancing your investment property

mrembecki · May 27, 2009

Hello,

I bought an investment property in 2007 for $167,000. I renovated it spending $12000 in materials and labour. I did most of the work myself, excluding the tiling of the bathrooms and kitchen backsplash. The property has been now appraised by my lender @ $198000. I am currently owing approx. $155000 on the home. Am I correct in assuming that I currently have $43000 in equity ($198000 - $43000)?? I do I go about pulling this equity out in order to use it for another investment?? Sorry for asking such simple questions but I can`t seem to get an easy answer. I would like to know what I`m saying when speaking with a lender for remortgaging the property.

Regards,

Marty.

manojsingh · May 27, 2009

You can refinance and get the equity out but 80% or 90% of appraised value. For example if you put 10% down at 167000 with CHMC premium and your mortgage is 155000 now. You will get 25000 (180000 -155000). You have to pay CHMC premium on this 25000 only.
My suggestion talk to Kevin Boughen (ph4165094047). He is a mortgage broker and expert in this. He will help you getting this equity out. Thanks

kboughen · May 28, 2009

QUOTE (mrembecki @ May 27 2009, 07:37 PM)
I am currently owing approx. $155000 on the home. Am I correct in assuming that I currently have $43000 in equity ($198000 - $43000)?? I do I go about pulling this equity out

Hi Marty, you are correct in that the total equity in the home is Current Appraised Value ` Mortgage = $43,000. However, you do not have all this available to re-invest. If you want a traditional conventional mortgage, you can only access 80% of the appraised value or $158,400. Since you already owe $155,000 this is not a viable option.

Another option is to consider a high ratio mortgage at 95% which would free up $33,100, less legal costs and any applicable interest penalties. CMHC fees would also be added to the mortgage in this case.

Adding a second mortgage or JV partner are also options.

You need to consider many factors before deciding on the solution right for you, including, impact on cash flow, cash reserves, qualification requirements and your investment strategy.

Feel free to contact me with any questions.

Thomas Beyer · May 28, 2009

QUOTE (manojsingh @ May 27 2009, 06:11 PM)
You will get 25000 (180000 -155000). You have to pay CHMC premium on this 25000 only.

the $25,000 is offset by a CMHC premium of about $10,000 .. thus: 40% .. very expensive money .. not recommended unless huge rental upside and minimum 5-year hold

QUOTE (manojsingh @ May 27 2009, 06:11 PM)
You have to pay CHMC premium on this 25000 only.

Actually, you pay the premium on the FULL amount and get a % rebate on the original amount .. thus a re-fi with CMHC makes sense only if the $ amount taken out is significant .. which is not the case here !

...

The best and cheapest option here is to re-fi with a LOC or mortgage at 80% of new value .. assuming it still cash-flows nicely. But, since 80% of 198K is a hair below 160K .. it is NOT worth the effort (with a 155K mortgage) unless you can lower the mortgage interest rate significantly !

Perhaps you paid too much for the house as this upgrade did not yield enough value upside .. it should be at least TWICE what you spend, i.e. spend 20K and value goes up 40-50K !

housingrental · May 28, 2009

Kevin and Thomas - I`m a bit confused re CMHC refinancing.
Once you`ve already purchased a home with a conventional mortgage you can after the fact get it to a cmhc mortgage ?

mortgageman · May 28, 2009

QUOTE (housingrental @ May 28 2009, 12:29 PM)
Kevin and Thomas - I'm a bit confused re CMHC refinancing.

Once you've already purchased a home with a conventional mortgage you can after the fact get it to a cmhc mortgage ?

yes. you would be replacing the original conventional mortgage with a high ratio mortgage.

housingrental · May 28, 2009

Thanks
Does this also apply to non-owner occupied properties?
So lets say I put down 25% to buy, have 50% equity, can I then change mortgage over to only 5% down and pay cmhc fees on an investment property?

Thomas Beyer · May 28, 2009

QUOTE (housingrental @ May 28 2009, 12:29 PM)
Kevin and Thomas - I'm a bit confused re CMHC refinancing.

Once you've already purchased a home with a conventional mortgage you can after the fact get it to a cmhc mortgage ?

no, you get a new CMHC insured mortgage .. and use these proceeds to pay off the existing ones PLUS any penalties for an early discharge !

housingrental · May 28, 2009

Thanks Thomas

I'm assuming this applies to both owner occupied as well as residential properties? or no?

Any additional costs associated with a new CMHC mortgage on a house you already own vs putting it on when initially purchasing ?

Are there any rough guidelines / formula's / links to what they'll allow for a mortgage on an occupied property (assuming it assess) based on income for self employed ?

QUOTE (thomasbeyer2000 @ May 28 2009, 04:59 PM)
no, you get a new CMHC insured mortgage .. and use these proceeds to pay off the existing ones PLUS any penalties for an early discharge !

Thomas Beyer · May 28, 2009

QUOTE (housingrental @ May 28 2009, 04:43 PM)
I'm assuming this applies to both owner occupied as well as residential properties? or no?

yes, either ..

QUOTE (housingrental @ May 28 2009, 04:43 PM)
Any additional costs associated with a new CMHC mortgage on a house you already own vs putting it on when initially purchasing ?

same from a CMHC insurance premium point of view .. but there may be costs to DISCHARGE existing mortgage, usually the higher of: 3 months interest or interst rate differential between current mortgage (say 5.5%) and current mortgage rates (say 4%) until maturity .. so with a 1.5% differential on a $200,000 mortgage for 3 more years you're looking at 3 * 1.5% * 200,000 = $9000 to discharge the existing mortgage !

QUOTE (housingrental @ May 28 2009, 04:43 PM)
..

Are there any rough guidelines / formula's / links to what they'll allow for a mortgage on an occupied property (assuming it assess) based on income for self employed ?

yes, Two rules:

Rule 1: Debt coverage ratio (DCR) of income (usually average over 3 years if self-employed, as per CAR tax filings !!) divided over all debt (incl. LOCs, mortgages, credit cards, car payments ..) ! Debt payment should not exceed 40% of gross income.

Rule 2: For a net new rental it usually means: DCR of 1.1 i.e. net income divided by debt payment on that property is 1.1 or better assuming a 50% expense to rent ratio.

Example: rent is $1000 .. thus $450/month is the maximum mortgage payment/month ($1000 * 50% / 1.1) !

But, any mortgage broker would be happy to provide much more details here (as I am not one ..)

PeterKinchMortgageTeam · May 29, 2009

QUOTE (housingrental @ May 28 2009, 03:43 PM) Thanks Thomas

I`m assuming this applies to both owner occupied as well as residential properties? or no?

Any additional costs associated with a new CMHC mortgage on a house you already own vs putting it on when initially purchasing ?

Are there any rough guidelines / formula`s / links to what they`ll allow for a mortgage on an occupied property (assuming it assess) based on income for self employed ?

It does apply to both - though the premium for high ratio rentals is signifigantly higher than for owner occupied properties.

CMHC does have a high ratio BFS program (owner occupied only) that allows for approval based on non verifiable income, when certain criteria is met. This program is not available on rentals.

Hope that helps,

housingrental · May 29, 2009

Thanks Thomas

For Rule 1 do they make any allowances if last year income was much higher than income three years ago, and consistent on an ongoing basis? And is there a discounting formula for this? Or I'm I stuck being averaged out from that time period?

QUOTE (thomasbeyer2000 @ May 28 2009, 08:12 PM)
yes, either ..

same from a CMHC insurance premium point of view .. but there may be costs to DISCHARGE existing mortgage, usually the higher of: 3 months interest or interst rate differential between current mortgage (say 5.5%) and current mortgage rates (say 4%) until maturity .. so with a 1.5% differential on a $200,000 mortgage for 3 more years you're looking at 3 * 1.5% * 200,000 = $9000 to discharge the existing mortgage !

yes, Two rules:

Rule 1: Debt coverage ratio (DCR) of income (usually average over 3 years if self-employed, as per CAR tax filings !!) divided over all debt (incl. LOCs, mortgages, credit cards, car payments ..) ! Debt payment should not exceed 40% of gross income.

Rule 2: For a net new rental it usually means: DCR of 1.1 i.e. net income divided by debt payment on that property is 1.1 or better assuming a 50% expense to rent ratio.

Example: rent is $1000 .. thus $450/month is the maximum mortgage payment/month ($1000 * 50% / 1.1) !

But, any mortgage broker would be happy to provide much more details here (as I am not one ..)

housingrental · May 29, 2009

Thanks

Re BFS program - I've tried searching the web and cmhc website but can't find any info on this. Do you have a link or info you can send me on it?

Re my last post to Thomas - If current and last years income were materially higher than income three years ago does that get any weighting?

Also - Can you go up to 95% of value on property you already own like you could with a new purchase or are there restrictions up to only 90 or 85% ?

How does CMHC assessing work for owner occupied ? Is it just based on assessment from bank or ?

QUOTE (CanadianMortgageTeam @ May 29 2009, 11:35 AM)
It does apply to both - though the premium for high ratio rentals is signifigantly higher than for owner occupied properties.

CMHC does have a high ratio BFS program (owner occupied only) that allows for approval based on non verifiable income, when certain criteria is met. This program is not available on rentals.

Hope that helps,

Thomas Beyer · May 29, 2009

QUOTE (housingrental @ May 29 2009, 10:33 AM) Re my last post to Thomas - If current and last years income were materially higher than income three years ago does that get any weighting?
I don`t think so .. some might use last 2 years only .. but ask a mortgage broker please as each bank is different and CMHC insures the bank .. thus the key contact point / decision maker is the bank or the mortgage broker .. NOT CMHC !!! !

Don`t forget the golden rule: He who has the gold, makes the rules !!

kboughen · May 30, 2009

QUOTE (housingrental @ May 29 2009, 12:33 PM) I`ve tried searching the web and cmhc website but can`t find any info on this. Do you have a link or info you can send me on it?
Income for CMHC Rental properties must be verified (not stated) this is true is you are BFS or a salaried employee. Some Lenders will accept the average Line 150 on your NOA for the last 2 years.

This link will take you to the CMHC guidelines for Owner Occupied properties. http://investormortgages.zoomshare.com/fil...eroccuppied.pdf

This link will take you to the CHMC guidelines for Rental properties (4-plex and under). http://investormortgages.zoomshare.com/files/CMHCrental.pdf

These links include all requirements and conditions regarding Fees, LTV, credit scores, income etc.

These are the guidelines of CMHC, each Lender has their own in addition. Hope this helps.

housingrental · May 30, 2009

Thanks Thomas

QUOTE (thomasbeyer2000 @ May 29 2009, 01:25 PM) I don`t think so .. some might use last 2 years only .. but ask a mortgage broker please as each bank is different and CMHC insures the bank .. thus the key contact point / decision maker is the bank or the mortgage broker .. NOT CMHC !!! !

Don`t forget the golden rule: He who has the gold, makes the rules !!

housingrental · May 30, 2009

Thanks !

QUOTE (kboughen @ May 30 2009, 01:10 PM) Income for CMHC Rental properties must be verified (not stated) this is true is you are BFS or a salaried employee. Some Lenders will accept the average Line 150 on your NOA for the last 2 years.

This link will take you to the CMHC guidelines for Owner Occupied properties. http://investormortgages.zoomshare.com/fil...eroccuppied.pdf

This link will take you to the CHMC guidelines for Rental properties (4-plex and under). http://investormortgages.zoomshare.com/files/CMHCrental.pdf

These links include all requirements and conditions regarding Fees, LTV, credit scores, income etc.

These are the guidelines of CMHC, each Lender has their own in addition. Hope this helps.

ohsofrugal · May 31, 2009

QUOTE (kboughen @ May 30 2009, 11:10 AM) Income for CMHC Rental properties must be verified (not stated) this is true is you are BFS or a salaried employee. Some Lenders will accept the average Line 150 on your NOA for the last 2 years.

This link will take you to the CMHC guidelines for Owner Occupied properties. http://investormortgages.zoomshare.com/fil...eroccuppied.pdf

This link will take you to the CHMC guidelines for Rental properties (4-plex and under). http://investormortgages.zoomshare.com/files/CMHCrental.pdf

These links include all requirements and conditions regarding Fees, LTV, credit scores, income etc.

These are the guidelines of CMHC, each Lender has their own in addition. Hope this helps.

kboughen,

In the first link provided it says rental income to be verified. Is this done via what they ascertain to be the market rent or using your lease agreements?

kboughen · May 31, 2009

QUOTE (ohsofrugal @ May 31 2009, 10:39 AM) In the first link provided it says rental income to be verified. Is this done via what they ascertain to be the market rent or using your lease agreements?

Verified rental income is at the discretion of the Lender. Typically you can provide a signed lease, or tax returns, or a Market Rent Report.