Apartment Building Financing - New Rules

[Nir]

Hi All,

I wanted to share a few interesting things I learned in a RE event this week, and ask if someone can confirm the following is really true about apartment buildings:

- CMHC insurance does NOT improve (=reduce) interest rate! CMHC allows you to put less down which is great but costs a lot to insure BUT it will not result in better interest rate compared to putting say 25% down without CMHC insurance. I thought insuring an apartment building through CMHC allows you to get residential financing conditions, meaning interest rate lower by around 2% (whether variable or fixed). However, the mortgage broker at that meeting clearly said this is not true.

- Banks offer VARIABLE MORTGAGE RATES on apartment buildings! not just fixed but it`s higher than prime. around Prime + 1.5%.
This is apparently a new rule from the past month! before that you could only get fixed.

Thoughts?

THANKS & REGARDS,
N.

 

[Thomas Beyer]

QUOTE (investmart @ Jun 18 2010, 11:03 PM) ...- CMHC insurance does NOT improve (=reduce) interest rate! CMHC allows you to put less down which is great but costs a lot to insure BUT it will not result in better interest rate compared to putting say 25% down without CMHC insurance. ...
Enlighten me/us please with some more details as your statement out of context is not true.

An apartment building can carry conventional financing, but a conventional rate for apartment buildings without CMHC is around 5.5% .. and with CMHC sub 4% .. so 1.5% better ! And yes, you pay a premium for it. It makes sense only for 5+ year mortgages. All our long term hold properties are CMHC insured, as conventional financing is 40% higher !!

A 2nd advantage is that you can go up to 85% loan-to-value if you so chose, as conventional financing is usually only 75%.

a 3rd advantage is that in some smaller markets hardly any conventional financing is available, and banks touch those mortgages only with CMHC.

We just locked in a 3.92% on a property we own in Yorkton, SK.

What is new, really ??

 

[kboughen]

QUOTE (investmart @ Jun 19 2010, 02:03 AM) CMHC insurance does NOT improve (=reduce) interest rate!
My experience has been that interest rates do not differ with CMHC on single family up to 4 unit buildings. The interest rate is determined by the qualification details of the Buyer.


However, with multi-family financing, buildings with +4 units, having CMHC will provide you with a better interest rate.

 

[Nir]

Thank You Kevin and Thomas for clarifying this.

I guess he confused apartment buildings with 4-plex or less then, and CMHC on apartment building indeed improves interest rate.

What about his statement that variable rate mortgages (VRM) are available for apartment buildings and mix-use properties even without CMHC:
is he correct on this one or do banks still offer only fixed interest rate for them? He mentioned variable has only become available last month(!)
(Even if he is correct I am surprised variable was not available before that!? why?)

THANKS.

 

[Thomas Beyer]

QUOTE (investmart @ Jun 24 2010, 07:33 PM) What about his statement that variable rate mortgages (VRM) are available for apartment buildings and mix-use properties even without CMHC:

My understanding is that variable rates are available with or without CMHC for apartment buildings X% over prime or banker`s acceptance usually .. Just not so common .. But are available by some lenders

Hence: what is new ?

 

[Nir]

QUOTE (ThomasBeyer @ Jun 24 2010, 09:34 PM) My understanding is that variable rates are available with or without CMHC for apartment buildings X% over prime or banker`s acceptance usually .. Just not so common .. But are available by some lenders

Hence: what is new ?
Thanks Thomas. he said it`s a new rule. I guess it`s not new then and he was wrong twice. glad I shared input from him here.
he lectured with confidence so a bit surprising he made stuff up just to look confident and knowledgeable

Cheers.

 

[housingrental]

For commercial non CMHC I was recently quoted 5.5% fixed or prime plus 2-2.5% - fixed seems the only reasonable way to go in this case.

 

[Thomas Beyer]

QUOTE (housingrental @ Jun 25 2010, 06:57 AM) For commercial non CMHC I was recently quoted 5.5% fixed or prime plus 2-2.5% - fixed seems the only reasonable way to go in this case.
and we did a CMHC loan at 3.92% .. thus a spread of 1.6% .. or 40% more expensive without CMHC .. and with a premium of 4.5% a break even of 3 years .. thus CMHC is the way to go for 5+ years !

 

[Nir]

QUOTE (housingrental @ Jun 25 2010, 07:57 AM) For commercial non CMHC I was recently quoted 5.5% fixed or prime plus 2-2.5% - fixed seems the only reasonable way to go in this case.

Thanks Adam for the input. you are correct, fix 5.5% sounds better than prime plus 2.5% even to someone like me who, generally, strongly prefers variable.

 

[Nir]

QUOTE (ThomasBeyer @ Jun 25 2010, 08:56 AM) and we did a CMHC loan at 3.92% .. thus a spread of 1.6% .. or 40% more expensive without CMHC .. and with a premium of 4.5% a break even of 3 years .. thus CMHC is the way to go for 5+ years !

correct math not considering the fact you need less down which by itself is an advantage equivalent to the ability to buy sooner which is expected to make money for you. so even if it had a break even of 5 years, CMHC would be the way to go. cheers.

Adam, Thomas, do you know if a variable rate is also available for mix-use (say 3 stores and 3 apartments) without CMHC?
also, is CMHC insurance available for mix-use or do you always have to put 35% down (assuming no VTB)? Thanks.

 

[Thomas Beyer]

QUOTE (investmart @ Jun 25 2010, 10:12 AM) correct math not considering the fact you need less down ..
NOT usually anymore .. as in most cases 85% loan-to-CMHC-value is the same, more or less, to 75% of loan-to-price or loan-to-appraised-value !!

QUOTE (investmart @ Jun 25 2010, 10:12 AM) Adam, Thomas, do you know if a variable rate is also available for mix-use (say 3 stores and 3 apartments) without CMHC?
Yes, in principle ... depends on bank .. some will do it ..

QUOTE (investmart @ Jun 25 2010, 10:12 AM) also, is CMHC insurance available for mix-use or do you always have to put 35% down (assuming no VTB)? Thanks.
yes, if the commercial component doesn`t exceed a certain amount (I believe 20%)

35% down is a rule-of-thumb .. shop around via a mortgage broker .. some might do 25% down ! Mortgage market has eased considerably this year compared to 2009 .. and tightened considerably more in 2009 compared top 2008 !

Most lenders have LOADS OF CASH and as such are flexible and stringent in their underwriting .. some need 15 year amortization, some need a personal guarantee, some do only 5+ years, some only over $1M, some not more than $5M, etc., some fixed only, some do not do commercial, some only commercial ...

 

[housingrental]

Thomas answered well in the above post
I`ll elaborate on his answers in case it doesn`t clearly answer your questions
RE " as in most cases 85% loan-to-CMHC-value is the same, more or less, to 75% of loan-to-price or loan-to-appraised-value "
Note that this varies materially on location and property type
35% down can even be needed for CMHC, etc..

There is a disconnect between assessed price and market price in many areas. For cmhc especially but non cmhc as well in certain segments - like certain student housing properties...

 

[Nir]

QUOTE (ThomasBeyer @ Jun 25 2010, 11:43 AM) NOT usually anymore .. as in most cases 85% loan-to-CMHC-value is the same, more or less, to 75% of loan-to-price or loan-to-appraised-value !!


Yes, in principle ... depends on bank .. some will do it ..


yes, if the commercial component doesn`t exceed a certain amount (I believe 20%)

35% down is a rule-of-thumb .. shop around via a mortgage broker .. some might do 25% down ! Mortgage market has eased considerably this year compared to 2009 .. and tightened considerably more in 2009 compared top 2008 !

Most lenders have LOADS OF CASH and as such are flexible and stringent in their underwriting .. some need 15 year amortization, some need a personal guarantee, some do only 5+ years, some only over $1M, some not more than $5M, etc., some fixed only, some do not do commercial, some only commercial ...

Thank You Thomas, Great information!