New Canadian mortgage lending requirements.

19 Replies

I thought I might see a little more about the new Canadian mortgage rules and how it's effecting investors, I would imagine this is more an effect on the smaller investors but I also wanted to know how they were finding funding.

@Jack Young

The "new" lending criteria in the latest amendments to B-20 are really not "new" so much as a return to the practices of an earlier time.

Given the band of interest rates for real estate financing in this country is historically in the 6-9% range, you should be using criteria at lease as rigorous as the new stress test when analysing a potential acquisition. 

That's great advice Roy and I do agree. I'm curious to know how investors are making their next move during the transition. Is the preference to stick with banks or are there other lenders out there giving competition as rates are poised to increase? What about other lenders in general?

This is very annoying if you plan to refi in 2-3 years, do you guys think this could reduce the banks appraisal much if the interest rate is 5% (from 3.25 right now)?

How do you calculate this?

Originally posted by @Philippe Busque :

This is very annoying if you plan to refi in 2-3 years, do you guys think this could reduce the banks appraisal much if the interest rate is 5% (from 3.25 right now)?

How do you calculate this?

Rising interest rates will exert some downward pressure on valuations - but the degree will likely depend on how highly overvalued a particular market is when the rates rise.

Thinking back to a double digit mortgage rate in my youth, the primary concern was not whether the lender would lower the appraised value if rates rose significantly, but that the lender might decide I could no longer adequately service the debt.   Now, it is unlikely we will see interest rates of 16% anytime soon, but if you think rates are to continue rising, then take advantage of the current rates to pay down extra principal.

If you were to model your property and operating budget based upon the BoC posted rate; secure a variable rate mortgage at 1.5 to 2 basis points less, but make payments as though you were paying the posted rate, you would take a huge slice out of your mortgage and have a built-in hedge against further rate increases.

Originally posted by @Roy N. :
If you were to model your property and operating budget based upon the BoC posted rate; secure a variable rate mortgage at 1.5 to 2 basis points less, but make payments as though you were paying the posted rate, you would take a huge slice out of your mortgage and have a built-in hedge against further rate increases.

 Very interesting, thank you.

I really like your idea of variable mortgage with a fixed style of payments @Roy N. and I have thought about doing something like this for some time, but was never sure what I should do or if I should. The idea at the time was a 30 year mortgage but increasing the payments to 25 or 20 years, as I'm not losing the money its just becoming equity instead and should something go wrong I can always decrease the payments down to the 30 year level.

Originally posted by @Jack Young :

I really like your idea of variable mortgage with a fixed style of payments @Roy N. and I have thought about doing something like this for some time, but was never sure what I should do or if I should. The idea at the time was a 30 year mortgage but increasing the payments to 25 or 20 years, as I'm not losing the money its just becoming equity instead and should something go wrong I can always decrease the payments down to the 30 year level.

We've been able to cut repayment amortization drastically and save 40-60% of the interest which would otherwise be paid while not stifling our cash flow ... during the term of a 5-year closed variable mortgage.   The key is to model and purchase your property as if you were financing at the BoC posted rate (or higher) and then make the payments as such even though you secure financing at a lower rate.     Naturally the greatest benefits and long-term interest cost reduction will occur during your first mortgage term(s) when the interest portion of your scheduled payments exceed the principal.

Back in '87 I picked up a home in Burlington ON for $62k. I had to take owner financing @ 19% as he was a hoarder & it was in very bad shape. My sister walked through it took one look at the kitchen then straight out out the back door & threw-up. Yet I saw the potential. I was told the bank wouldn't look at it until the rehab was done. I spent 3 months gutting/rehabbing & the bank appraised it at $90k so we refinanced & the rest is history. Our family still owns it.

Originally posted by @Jacob Perez :

@Pat L. Stop making us jealous of the good ol' days lol

Good Ol days ... we bought a triplex for $32K last year (vacant); one for $46K (full, under market rents) and one for $75K (full, near market rent) .... you just need to dig ;-)

your deals are definitely inspiring @Roy N. , this sounds like something you would buy in the states, or are the opportunities that good in eastern Canada? Either way I've been spending a lot of time looking for ways to find off market deals in my part of the world and it is a daunting task, anything that pops up on MLS isn't going to be there long.

@Jack Young

Those purchase prices can be had ... you are going to pour at least that much again back into the properties to overcome the neglect to which they have been subjected.    Even here - like most places - the real deals are off-market.

@Roy N.  

Driving for dollars seems to be about the only concrete thing that finds anything off market, I would love to get tips from you sometime.

@Roy N.

"built-in hedge against further rate increases."

If you really want to build a hedge against rate increases don't put the extra money into dead equity invest in a income fund in a TFSA or any vehicle. Dead equity earns next to no return. As it grows it reduces your ROI where as putting in in a investment fund will generate higher returns, 8 - 12% easily, and be available when and if you need it.

If you are going to park cash as a "hedge" at least invest it somewhere that it will earn it's keep till you need it. Real estate is the worst place to bury your dead dollars.

Originally posted by @Roy N. :

We've been able to cut repayment amortization drastically and save 40-60% of the interest which would otherwise be paid while not stifling our cash flow ... during the term of a 5-year closed variable mortgage.

Can you elaborate on this a little more? 40-60% is HUGE and when you mention cash flow this flies right in the face of all those investors out there that keep telling me, at least in general, maximize your cash flow as much as possible. I've always liked the idea of paying things down, but that does not mean your loosing that money at all, its just sitting somewhere else and giving you a safety net at the same time.

Originally posted by : @Thomas S.

If you really want to build a hedge against rate increases don't put the extra money into dead equity invest in a income fund in a TFSA or any vehicle. Dead equity earns next to no return. As it grows it reduces your ROI where as putting in in a investment fund will generate higher returns, 8 - 12% easily, and be available when and if you need it.

If you are going to park cash as a "hedge" at least invest it somewhere that it will earn it's keep till you need it. Real estate is the worst place to bury your dead dollars.

This is something I have thought long and hard about, it also relates to my reply above and I'm not sure I would call it "dead" as it can still be a reliable place to go for your deals. A secured line of credit can be an extremely useful tool with low interest rates and ease of borrowing, while saving you an equal amount in interest on the property your paying down. This is one subject I have been struggling to know exactly how I will go about dealing with in the future.

@Jack Young although it is saving you money (the equilivant of the mortgage interest rate) it is losing money based on what it could be earnings. You are saving 5% and losing out on 10%.

Additionally dead equity is not that accessible in a property. You are limited on how much you can access if you can find a bank to finance, it comes with admin fees and you lose it if the markets turn. There are risks regardless of where you put it but real estate is a low return lock box.

Originally posted by @Thomas S. :

@Jack Young although it is saving you money (the equilivant of the mortgage interest rate) it is losing money based on what it could be earnings. You are saving 5% and losing out on 10%.

Additionally dead equity is not that accessible in a property. You are limited on how much you can access if you can find a bank to finance, it comes with admin fees and you lose it if the markets turn. There are risks regardless of where you put it but real estate is a low return lock box.

Now Thomas, pre-paying a mortgage is not automatically "dead equity".  It comes down to a math problem and what provides you with the better return .... you are not always saving at 5% and loosing at 10%.

Additionally, equity in your properties need not be inaccessible.  If you choose appropriate financing products - variable rate and/or hybrid mortgage/LoC you can access the equity with very little to no penalty or hindrance.