Thoughts on new mortgage rules that were announced?

[darkness05]

Just curious what the experts/experienced thoughts are on this new announcement? Specifically how it may hurt/help us in the investment world.

Thanks!

http://business.financialpost.com/p...ew-mortgage-rules-finance-department-projects

 

[Tina Myrvang]

By Peter Kinch

There are two major sectors impacted by these new mortgage rule changes:

1. First time homebuyer's and/or anyone looking to buy a home with less than 20% down. The reality is that, as of today, you will have to show more income or qualify for a lower amount.

2. Non-bank lenders such as Merix, First National etc who use 'back-end' insurance on their mortgages will have to follow high ratio rules even if the borrower puts more than 20% down - that means no more 30 year amortizations, mortgages on properties over $1 million or mortgages on rental properties.

However, there is no indication that these rule changes will have any impact on conventional mortgages done at a Chartered bank or Credit Union. On one hand, that's good news but on the other, it means less competition - and that's never a good thing for the consumer.

The biggest impact for a real estate investor will be the loss of access to the ‘non-bank’ lenders for rental properties. Merix, for example, was one of the few lenders who still provided mortgages to investors in their company name – but as of today, they will no longer provide mortgages on rentals as a result of the new rules.

It is important to maintain perspective however – the loss of potential lenders in the rental space is never a positive thing, but cannot be confused with the fact that those mortgages are no longer available. From what we can tell Ottawa can still only impose restrictions on ‘insured’ mortgages and as such, a Chartered bank or Credit Union who ‘does not’ back-end insure their portfolios (a process that is largely blind to the general consumer) is still free to dictate their own terms for conventional mortgages – including rentals. So for the most part, it should be business as usual for those lenders when it comes to real estate investors.

Having said that, with the elimination of the Monoline banks as a player in that sandbox, there will be less competition so I won’t be surprised if we see the Chartered banks impose their own restrictions moving forward. Look for some Credit Unions to step up and take this as an opportunity to fill a void! The other area we’ll be watching very closely is ‘Cap-Space’ at each bank, as they will likely see an increase in mortgage applications from investors who may have otherwise chosen a Monoline.

So what does this mean to you as a real estate investor?

Quite simply - it becomes more important than ever before to be thinking two to three moves ahead when planning your mortgage portfolio strategy. You may be faced with few options, so which lender to choose and when to use them based on their Cap Space will become increasingly more important. If you plan to buy multiple properties moving forward, the BluePrint is now an essential tool for your success. Keep in mind, individual lenders may choose how to react differently over the course of the next month but when and how they do, you can be assured that we will incorporate that into your real estate investor Blueprint and help you integrate it into your overall business plan to help ensure your success – whatever Ottawa does next.

Read more about the regulation changes here.

Peter Kinch is the owner of DLC Peter Kinch Mortgage Team and Co-Author of the #1 Best Seller “97 Tips for Canadian Real Estate Investors”.

 

[REInvestors888]

In my opinion, the most impacted buyers are low income locals who can't afford to put over 20% down payment. For "rich Chinese immigrants" they still can afford to invest in Canada's housing market and flip it and pocket the money without paying capital tax. Why? Because let's admit it Ottawa or BC or Toronto do not have a system to track "immigrants" who actually buy and reside on their supposed to be residence! So with the imposition of 15% sales tax they closed the gate in BC but the floodgate is still wide open in Toronto housing market!

Just my 50 cents.........any other thoughts???

 

[Matt Crowley]

Wow that post from Peter Kinch is hard to follow. Is it just me?

A quick summary from Edmonton Journal:

A buyer who makes a down payment that’s less than 20 per cent — in other words, most buyers — will have to qualify at an interest rate equal to the Bank of Canada’s conventional five-year fixed posted rate of 4.64 per cent, which is roughly two full percentage points above the rate most new mortgage holders now pay. Source: http://edmontonjournal.com/business...ortgage-rules-likely-to-hit-first-time-buyers​

My thoughts:
1. decrease sales velocity in resale market
2. developers and builders will view this as a supply restriction because it is.
3. this will put downward pressure on home prices
4. impact will be felt at all price points with less than 20% down

Expect interest rates to increase up to 2% in medium term under 5-years. BOC is clearly sending a pricing signal. Calculating what you can afford to pay for a mortgage at 2% was getting a bit ridiculous. Not enough diligence paid to the gross total of debt.

I believe this is a reaction to global concerns:
1. printing money has not led to rapid inflation and some economies (Japan) are experiencing deflation. Deflation is a growing global concern.
2. there is a growing stream of trade protectionism across the globe and an anti-free-trade movement. As an exporter, we need to have the ability to raise interest rates to devalue our currency and keep our goods competitive across the globe.
3. there is no room to cut interest rates

 

[Thomas Beyer]

Because the Bank of Canada cannot AND WILL NOT raise interest rates (as it will make the currency artificially high and impact stock market values and curb investment even further) the government has to find other ways to contain price inflation of urban residential real estate, such as

a) restriction on mortgage levels,

b) disallowing insured CMHC mortgages for banks (for over 20% down buyers) and

c) artificially creating underwriting criteria disconnected from the real interest rates to lower loan amounts specifically using the banks' five year "rack rates" of around 4.5% to qualify for mortgage as opposed to the more typical 2.2-2.5% actual rate. This will lower eligible loan amounts by almost 20%. Ouch !

All this of course is coated in "to protect the middle class" but it is in fact hurting the middle class.

We will indeed see lower loan amounts for almost EVERYONE, especially investors and below 20% down folks, and less money supply thus somewhat higher rates. This will keep price escalation somewhat in check and make real estate investments somewhat less lucrative, as prices will rise slower and you need more cash per house.

On the flip side, it will create more renters, thus higher rents, and that is good for existing landlords, both SFHs, condos, mobile home parks and multi-family. Landlords rejoice and would-be buyers weep.

Consider switching asset classes - or earlier as you will be tapped out earlier after owning a few houses - perhaps after the 3rd or perhaps only after the 5th house.

Commercial underwriting has NOT changed. It is based on debt coverage of the asset, irrespective of borrower's personal income, unlike SFH and condos, i.e. consider buying multi-family, mobile home parks, industrial warehouses, office buildings, retail or hotels !

 

[Thomas Beyer]

What happens when a Merix mortgage comes up for renewal on a rental property?

You will have to find a new lender or sell the property.

 

[REInvestors888]

Just wondering how millennials with low income can afford to buy a house and raise own family. It's not surprising to see unmarried couples without children still living in parents' basement suites or rent forever.

I believe this new ruling is so unCanadians.

What a stressful life!

 

[Thomas Beyer]

Canadians had until this point one of the highest ownership ratios in the world, if not the highest, around 70%. Both UK, Europe ( about 50%) and US ( about 65%) are lower. Australia and NZ are right up there too in the high 60's / low 70's.

The two main reasons were cheap land and thus house prices and very low downpayment requirements for first time buyers.

Both of these main factors have been changing - bit by bit - over the last few years as house prices have steadily increased and mortgage rules progressively tightened. This latest announcement is the latest - but possibly not the last - step in increasing mortgage qualification rules. As to the actual effect we shall see but as a rule of thumb you will qualify for less and with less money being available interest rates may go up a hair, especially for non-prime high LTV borrowers and likely investors. Actual impact is TBD though.

==> You can still buy with 5% down and you can still use RRSP money for the downpayment.

Existing landlords rejoice as the pool of renters will increase as more will be unable to get the required mortgage they had in mind.

 

[REInvestors888]

Thanks Thomas for always sharing a lot of excellent thoughts, expertise and experience through this Forum.

 

[Thomas Beyer]

Thanks Thomas for always sharing a lot of excellent thoughts, expertise and experience through this Forum.

On re-financings some non-bank lenders will disappear altogether making SFH/condo refinancings more complicated to impossible if too high ratios. Many non-banks will renew existing mortgages but not hand out new ones, especially to rental properties. SFH/condo real estate investors need to be very mindful of this potentially dangerous situation where you will possibly be unable to refinance at low rates, or at all. Check your SFH/condo portfolio for debt coverage ratios.

Some asset trimming might be in order before you get caught on refi time. Hopefully some of the mortgage books of non-banks will be bought by the six major Canadian banks and the refi headaches will be easier or eliminated, but there is no guarantee for that.

 

[alaas1977]

Could the new rules perhaps bring back the "Owner financing"?

 

[Willyboy]

For the last few days or so I have almost gone through every single news or forum article on the new rules with the respective comments on the topic by thousands of people online and what I don't understand in the comments is there's lots of comments that people specially first time home buyers will no longer be able to afford to buy a house but never mentioned or thought of the possibility of house prices coming down which will offset the higher down payment they would have to come up with and so they will be able to afford at a lower price and with less debts which will make them more comfortable in the long term.

Another thing I don't understand is why people have taken lots of debts over the last decade. If you can't comfortably afford something then why buy it in the first place.

Ok now I could be wrong regarding the possibility of house prices coming down but it could happen and people have to think of it as a possibility before starting to whine over. At least give the market some time to see what happens.

Please correct me if I'm wrong.

 

[Matt Crowley]

@Willyboy yes good observations. A lot of buyers, especially new home buyers will spend everything they are approved for. I subscribe to several newsletters from larger builders in Edmonton and everyone is advertising how the rule changes will erode 20% of their purchasing power. (So hurry up and buy before October 17th)

Another thing I don't understand is why people have taken lots of debts over the last decade. If you can't comfortably afford something then why buy it in the first place.

I think this is due to:
- an expectation of highly rising prices meaning it is smarter to buy today than to buy tomorrow (proved to actually be flat or deflationary)
- just like how banks were too big to fail (still are), monthly payments are too cheap to not afford

From the Great Recession, in the US we saw consumers with overburdened debt and very cheap debt available for large institutions. 7 million Americans lost their homes. Insured money vs. no maximum loss money, and a weakening middle class and strengthening of super-elite.

 

[Thomas Beyer]

.. people specially first time home buyers will no longer be able to afford to buy a house .. possibility of house prices coming down ...

First of all the qualification using the "rack rates" of say 4.5% rather than the actual rate of say 2.2% will result in a roughly 20% lower mortgage. This does NOT mean that you cannot buy a home with 5% down, it just means you can buy only a smaller home.

And yes, secondly, it means that only in some instances existing homes will come down somewhat in prices, or more specifically that builders will build smaller or less expensive homes.

Do not expect a major house price correction, but a less gradual increase. Also do not expect an immediate increase in mortgage rates as some existing 6 major Canadian banks (TD, CIBC, Royal bank, Scotia, HSBC and BMO) may end up buying the mortgage book of many non-bank lenders to boost their own market share of the lucrative and sticky mortgage business.

So all will be very gradually.

.. Another thing I don't understand is why people have taken lots of debts over the last decade. If you can't comfortably afford something then why buy it in the first place ...

Debt is cheap and as such it does make sense to get a big mortgage in a rising market if you can afford the payments. The key issue is "can you afford it" and "what happens if I have to move" as banks make almost as much money on the mortgage break fees as with the actual monthly payments. Mortgage discharge fees are very high and hiring a realtor, legal fees and actual moving costs are quite high. So buying a big house - too big perhaps - makes sense if you know you will stay in it for at least 5 years. It gets worse if you put down less than 20% as the CMHC fee east up almost any equity in a 5% down deal. As such, try to avoid that, and opt for 20% down instead, by begging grandma, dad or mom for some cash, for example.

 

[REInvestors888]

Technicalities are a bit confusing......so if someone wants to take advantage of the old ruling he/she must buy and close on or before Oct 17? Or he/she can get the Offer accepted before Oct 17 regardless of the closing date? Please clarify. Thanks.

 

[CraigSmith]

Technicalities are a bit confusing......so if someone wants to take advantage of the old ruling he/she must buy and close on or before Oct 17? Or he/she can get the Offer accepted before Oct 17 regardless of the closing date? Please clarify. Thanks.

You must have an accepted offer by Oct 16, 2016 to take advantage of the old ruling. The application date to be approved by CMHC or Genworth through your lender can be after the 16th. The possession date can be at a later date but check with your lender as to how long you have to close if you are looking for a longer possession date.

 

[CanadianMortgages]

Just curious what the experts/experienced thoughts are on this new announcement? Specifically how it may hurt/help us in the investment world.

The new mortgage rules are intended to curb systemic risks from the market that would normally be kept in check by higher interest rates.
Given Canada’s lackluster economy, the Bank of Canada is in no position to raise rates, which means that alternative measures are needed to ensure that the market doesn’t overheat (many believe it already has).

The new rules will impact first-time homebuyers and anyone else looking to purchase a home with a down payment of less than 20%. The new stress test also means that lower income households will struggle to qualify for bigger mortgages. As the rule changes primarily affect CMHC insured lenders, the net effect will be to migrate risk away from the government and that will result in an increase in the yields that private sector investors demand to hold the equivalent debt prior to the rule change.

 

[Thomas Beyer]

The new mortgage rules are intended to curb systemic risks from the market that would normally be kept in check by higher interest rates.

It will also affect non-bank lenders that used to insure mortgage portfolios with CMHC after they issued the mortgage to borrowers. That would re-risk their portfolio allowing more lending and easier borrowing from investors to fund these mortgages. This is also being curtailed and the result is higher interest rates and less money available from non-bank lenders, and thus fatter bank profits.

The institutional bums (#DrainTheSwamp etc ) in the US were thrown out Nov 8 but they are still fat and well connected via the finance minister in Toronto and Ottawa ! Don't believe all they hype it is to "cool the housing market". It is also about fattening banks' profits.

The economy will be negatively affected by it as will house prices as availability of money and pricing of it matters a lot.

RBC the latest to raise rates, because they can as Ottawa removed much of the competition: http://business.financialpost.com/n...ts-discounted-mortgage-rates-across-the-board

All I can say is that the Liberals are walking a very fine line here if they mess too much with people's biggest asset's values.

 

[darkness05]

We were just denied a refi or HELOC from our credit union here in Kelowna (Valley First). The house has a 330K mortgage with a value of 600K and they won't do a thing. We have no issues getting approved for new mortgages with the big banks but these guys won't budge. Frustrating for sure.

 

[Thomas Beyer]

Protecting the "middle class" .. sunny ways style.

#DrainTheCanadianSwamp.

Who is making Canada great again ?