government policy

CMHC Mortgage Regulations to Restrict Real Estate Investment

I’ve been hearing rumours recently that CMHC was changing their financing criteria for real estate investment properties.

Over the last couple of weeks,we’re heard about raising the minimum downpayment (New Mortgage Rules for Real Estate Investment in Canada) that an investor would need to put down on a rental property (that wasn’t owner-occupied, meaning the owner or a close relative was living there), and that rates will be heading up come July 2010 (Interest rate updates from a mortgage broker).

This week I’ve learnt that CMHC is also planning to, effective April 19, 2010, change things a whole lots more.

Rental Offsets

Currently when you buy a rental property, CMHC will allow you to use a 80% rental offset, which means that they used to take 80% of the gross rental income that the income property generated, and subtract that from the borrowers total debt, to establish the total debt service (TDS) ratio. 

What that means is that you don’t have to have the household income to cover 100% of the value of the rental property, like you do with a home you live in, because the bank will let you offset the debt using 80% of the revenue the rental produces (does that make sense?).

They’re changing this amount to 50%, which makes it much tougher for people to qualify for investment properties, but the real kicker is that…

CMHC is also changing how they evaluate the current debt and income on your existing rental portfolio – they are treating the rental income here the same as other non-salaried income too, meaning your current portfolio, while it generates cash flow every month, might hinder the growth of your portfolio going forward.

We also think that most lenders are going to adopt these standards, even for non high ratio loans that are not CMHC insured, just to be cautious.

Bottom Line

If you qualify under today’s standards for a loan for 1 or 2 townhouses, come april 19, you may not.  Let’s talk before then so you know all of your options.

PS – if we have an agreement of purchase and sale (a real estate contract) dated before april 19, and the mortgage is approved, the rental property can close after.  You don’t have to complete the purchase by april 19, just have the contract written.

Leave me a comment below with any questions, and please contact me for more information at 519-772-4376 or via email at Benjamin@BenjaminBach.com

government policy

New Mortgage Rules for Real Estate Investment in Canada

My wife and I are in the Carribean this week doing some research, so posting has been light. However, I want to pass along a few articles my friend Jeff Zabel, with Mortgage Alliance in Kitchener Waterloo emailed to me.  They are about changes to the mortgage rules, and will affect real estate investors:

This morning Finance Minister Jim Flaherty made the following three announcements to mortgage insurance rules

1. Variable mortgages qualified at five year fixed rate;

2. Refinancing limited to 90% instead of 95%;

3. Non owner occupied residences [I read this as single family properties bought for rental purposes -BB] require 20% down payment;

This announcement is the result of a review process on debt levels undertaken by the federal government that CAAMP has been actively engaged.  We released Will Dunning’s debt report, consulted with members  and took a position with decision makers in Ottawa that while we opposed changes to the current 5% down payment rule and 30 35 year amortization rates for primary residences, we were open to other changes if the government deemed there to be a problem.  The changes announced this morning reflect CAAMP’s position and do not affect primary mortgages except for the first point where many lenders are already qualifying at 5 years anyway.

Jeff is being told that these rules will be effective april 19th, 2010, so we may be able to still take advantage of the current terms and rates if you’d like.  Contact me for more information regarding that.

Jeff also sent me this article from the Canadian Press, which came out before the initial announcement, so it contains speculation, not fact:

New mortgage rules introduced to lessen mortgage crunch risks: sources say

By Julian Beltrame, The Canadian Press

OTTAWA – The federal government is expected to announce new rules Tuesday that would make it more difficult for first-time buyers to enter Canada’s hot housing market.

Sources have told The Canadian Press that Finance Minister Jim Flaherty is ready to move on the issue because of concern Canadians may be taking on too much debt.

Economists have advised the minister the best way to protect Canadians is to institute a debt affordability test in order to qualify for a Canadian Mortgage and Housing Corp. insured mortgage.

Currently, prospective home owners can qualify for a CMHC insured mortgage if they put at least five per cent down on the cost of a home.

But bank officials say they usually apply a cushion to ensure home buyers have sufficient income to meet payment requirements if floating rates rise, in some cases by more than two percentage points.

Flaherty is expected to make such an income test a condition for acquiring an CMHC insured mortgage.

Another possibility is for the minister to reduce the amortization period from 35 years to 30, which would have the effect of raising monthly payments. [note: it does not appear this happened -BB]

It is believed Flaherty rejected more radical measures to cool the housing market, which has reached record levels in sales and near record levels in average home prices despite the weak economy.

Economists have cautioned the minister against putting on the brakes too strongly. They say raising the minimum downpayment requirement to 10 per cent, one of the suggestions given the minister, could cause a crash in a key mainstay of the fragile economic recovery.

The Bank of Canada has been warning for months that homeowners should ensure they can absorb an increase in their floating rate mortgages once rates start rising, likely as early as this summer.

By the central bank’s own stress test calculation, almost one in 10 households would have a debt-service ratio that makes them vulnerable to economic shocks by the middle of 2012 if current trend continue.

In an address written for deputy governor Timothy Lane last month, the bank suggested the government has all the tools it needs to address the problem.

"An array of supervisory and regulatory instruments can be used by the government to restrain a buildup of systemic risks," said notes the address.

government policy

Waterloo will not vote on amalgamation, as per Council

Some disappointing news out of last night’s Council meeting in Waterloo – our elected city councilors think its best to not ask the citizens our opinion.  Hmmmmmm…..   Regardless of if you’re a pro or con on amalgamation, shouldn’t the voters get to debate and decide?

Waterloo votes down merger question

By Brent Davis, Record staff

WATERLOO — The prospect of merging the cities of Kitchener and Waterloo may have died Monday night with Waterloo council’s decision not to ask for a referendum on the issue.

After hearing from several delegations — most of whom spoke against the idea — and speaking passionately about the issue themselves, councillors ultimately defeated the motion in a recorded vote.

A group of more than 60 local business and community leaders asked Waterloo and Kitchener to seek permission from the provincial Minister of Municipal Affairs to hold a referendum in this fall’s municipal elections.

The question the group proposed is: “Would you support members of council engaging in a dialogue about the merits of merging Kitchener and Waterloo? Yes or No?”

Kitchener council has already voted in favour of the move.

Two weeks ago, Waterloo asked for more time to consider the issue. Last night, Mayor Brenda Halloran and councillors Mark Whaley and Ian McLean voted for the motion. Voting against were councillors Scott Witmer, Jan d’Ailly, Karen Scian, Angela Vieth, and Diane Freeman.

Freeman said the issue had been considered and rejected several times in the past, and only served to divide the community.

“We say things about each other that are hurtful and that are destructive,” she said.

Halloran, on the other hand, said it was necessary for the citizens of Waterloo to have their say.

“How do we move forward if we don’t allow people to have a voice?” she asked.

Prior to the vote, council heard from several members of the public.

“There is no groundswell of support from either the citizens of Kitchener or Waterloo,” argued Stan Rektor.

Several people voiced their concerns about differences between the two cities, especially when it comes to conflicting approaches to environmental preservation and urban development.

Rosemary Smith, executive director of the Kitchener and Waterloo Community Foundation, and a member of the group advocating for merger talks, had urged council to pass the motion.

“I believe it is a discussion we must enter into in earnest,” she said. “Help us set the stage for an important conversation about our future.”

After the vote, Smith expressed her disappointment with the results, but said there was still work to be done.

“The citizens of Waterloo have not yet spoken, and until they do, I think it’s still alive.”

I am in favour of the referendum; what do you think?

government policy

Flaherty to public: Hold on, I’m thinking, watching and monitoring real estate market

Canadian Government still looking at shorter mortgage amortizations on real estate purchases, but no indication of decision yet

So much talk, so little action.  Typical of a government, so I probably shouldnt be surprised

On December 22 I wrote Flaherty comments further on Canadian Real Estate and Mortgages and on Janaury 13 I reported in What is the Bank of Canada doing with mortgage rates? that Flaherty was still looking at what to do.

Today comes news that… drum roll please… Jim Flaherty is still “watching and monitoring” the real estate market in Canada 

“As you know, we took steps a year or two ago to require at least a 5% down payment and to restrict the amortization period for insured mortgages but we’re watching that. Low interest rates obviously are having an effect on the strength of the housing market in Canada," he said, warning "people have to make sure that the mortgages they take out today either have a fixed rate or they know that they’ll be able to handle increases in that mortgage rate later on."

CIBC World Markets senior economist Benjamin Tal says the bigger issue for consumers would probably be an increase in downpayment as opposed to a change to amortization schedules. Even though half of mortgage origination is said to be going for a longer amortization, Mr. Tal issued his own report that shows 40% of Canadians opt to make an extra month’s worth of payments each year.

Called accelerated bi-weekly payments, consumer make payments every two weeks instead of twice a month and the impact is considerable. "On a $250,00 mortgage with 5% rate amortized over 30 years, that works out to a de facto shortening of the amortization period by five years," says Mr. Tal, adding if rates rose by 75 basis points, consumers could absorb the increase by simply stopping the accelerated payments.

Mortgage credit was up about 7% year over year when Mr. Tal wrote his report but he thinks dramatic changes to downpayment levels and amortization are not necessary at this point. "Be careful you don’t kill a fly with a hammer. You could derail the housing market for no good reason," says Mr. Tal.

In real estate circles, many privately grouse about Mr. Flaherty’s overreaction to an improved housing market that still fell well short of records set in 2007. "You don’t want to see anything that affects the ability to purchase," says Gary Friend, president of Canadian Home Builders’ Association. "You make changes and in a place like Vancouver where I am, it could have a significant effect. At the same time we respect the need for prudent credit conditions and smart borrowing."

What do you think – should the government further tighten the regulations around minimum downpayments and amortizations? Let me know by leaving a comment below

government policy

What is the Bank of Canada doing with mortgage rates?

Many people are speculating that the Bank of Canada will be raising rates.  While the consensus amongst those I speak to is that rates have nowhere to go but up (and we are closing on a loan with a 2.4% interest rate on friday, so that’s a pretty solid perspective), the question seems to be when they will go up.  The Bank of Canada is indicating that they won’t be raising rates any time soon.

Bank of Canada Won’t Raise Rates in Short Term

Mr. Lane said the bank understands the concern, but it uses its lending rate to keep inflation in check for the whole economy and the housing market is “only one of several factors” that influence inflation.

Other sectors could be adversely affected if the rate jumped before the broader economy was ready, he said.

“If the Bank were to raise interest rates to cool the housing market now – when inflation is expected to remain below target for the next year and a half – we would, in essence, be dousing the entire Canadian economy with cold water just as it emerges from recession.”

Instead, he said, the government could increase capital requirements for lending institutions, adjust loan-to-value ratios and change the terms and conditions required to obtain mandatory mortgage insurance.

“These instruments can be targeted to risks to the entire financial system that stem from particular markets or institutions,” he said. “Ultimately, it is the Minister of Finance who is responsible for the sound stewardship of the financial system.”

In an end-of-year interview with CTV, Finance Minister Jim Flaherty said the government would consider raising the minimum down payment from 5 per cent “to a higher figure” and reducing the amortization period of 35 years to "something less."

But the Minister stressed that the government has not yet made that decision.

If you want to invest in real estate and take advantage of the current low rates and generous financing terms, lock your rates in now. If you are dealing with a mortgage broker or bank that is familiar with helping investors, let them know you want to lock in a commitment for as long as possible (likely 60-90 days), and then call me to find a profitable investment opportunity. 

Money will be getting more expensive.  Look at borrowing some now if you had an investment goal on your list in 2010.

government policy

Commentary on the Canadian Real Estate Market

Keller Williams released our monthly This Month in Real Estate report today, and there is some terrific information in it:

All around signs appear to be brighter than they were this time last year – banks are profitable, confidence is up, employment is on the upswing lately, and the housing market is moving. Ottawa’s Centre for the Study of Living Standards reports shows that consumption has grown in “leaps and bounds” from $30,000* per person in 1981 to $50,000* in 2008. That’s per person, with the average Canadian family being 2.37 people. That brings consumption per family to $118,500 for the average family.

The upcoming Olympics are expected to provide a beneficial influx of money for Canada and for Vancouver. The small business sector in British Columbia has the most optimistic outlook of all provinces in the country, most likely due to the games. The dramatic 253% increase in home sales in the Greater Vancouver area could also be partly fueled by the Olympics.

01 This Month In Real Estate Canada 2010

View more presentations from Keller Williams Realty.

The country appears to have traveled quite a distance over the past year – from the verge of the next depression last year to what appears to be an economy that’s found its way to firmer footing. One example is that most consumers planned on spending more this year on gifts for the holidays this year than last year.

With some concerns that the housing market has rebounded too much, too fast; it is important to keep in mind is that year-over-year increases are compared to an unusually weak year.

Read more

government policy

Flaherty talks more about Canadian Real Estate & Mortgage Markets

Yesterday we looked at reports from Ottawa that Finance Minister Jim Flaherty was looking at tightening up mortgage regulations, specifically increasing the minimum down payments and reducing the maximum amortization periods (currently 5% and 35 years).

This morning Bloomberg has more from Flaherty (but still no specific proposals):

Flaherty, in an interview today, said recent price increases for homes in Canada are due to a “confluence” of factors including low interest rates, an improving economic outlook and a stabilizing job market.

“We always watch the housing market to make sure that we do not see the development of an asset bubble,” Flaherty, 59, said during an interview in his office in Ottawa. “There would have to be clear evidence of an asset bubble in residential real estate in Canada, which there is not right now,” for the government to take steps.

The lowest mortgage rates since the Korean War have helped fuel a 67 percent jump in existing home sales in November from their January low, with the average price up 19 percent from a year ago to C$337,231 ($317,335), according to data from the Canadian Real Estate Association.

Bank of Canada policy makers Dec. 10 cautioned that rising debt levels will make Canadian households more vulnerable when interest rates rise. Households have kept adding debt this year while other countries such as the U.S. and U.K. have seen reductions in debt-to-income ratios, leaving more Canadians at risk when interest rates rise, the Bank of Canada’s report said.

…

“There are very low interest rates of course, the Canadian economy is showing signs of recovering, although it has not yet recovered, the job market has stabilized, so there are some encouraging signs for Canadians,” Flaherty said.

Canada last year tightened mortgages rules. Home loans insured by the government through the Canada Mortgage and Housing Corporation were limited to a maximum term of 35 years and required a minimum down payment of 5 percent, up from zero.

Were the government to eventually consider new measures for the housing market, they would likely be similar to the changes implemented in 2008, Flaherty said today.

“What we have done before can be done again,” Flaherty said.

In other news out of Ottawa, Prime Minister Stephen Harper says that “the government is "optimistic that 2010 is going to be a year of recovery," he also cautioned that Canada’s record-breaking low interest rates will come to an end.”

CIBC World Markets just released a report stating that Canadians need to manage increasing debt levels, but that there are several factors that should ‘buffer Canadian homeowners from being saddled” with loans more expensive than they can afford:

These include the fact that some mortgage-holders have substantial home equity, even if home prices drop. Some also have high debt payments that could be reduced, because the high payments are meant to accelerate the paying down of the mortgage principal.

The report said that history suggests many Canadians will jump from variable to fixed mortgages in time to avoid the full brunt of a variable mortgage rate shock. Also, Canadian financial institutions generally issue variable rates only to customers who quality for a three-year fixed-term rate, which is well above current variable rates. So, while variable rates will likely rise, most will be able to absorb the rate increase and remain within a qualification threshold.

"The result is that [the] number of Canadians truly at risk could be substantially less than the Bank of Canada’s estimate," said Avery Shenfield, CIBC World Markets chief economist.

If you have any questions about how the current economic conditions relate to your real estate investment holdings, email me or call 519.772.4376 to set up a complimentary consultation. 

You can follow me on http://twitter.com/BenjaminBach for up to the minute updates about real estate investment opportunities & news in Kitchener Waterloo

government policy

Ottawa hints at tighter mortgage regulations

From the Globe & Mail today:

Hints by Finance Minister Jim Flaherty that Ottawa may tighten mortgage eligibility rules to avert a possible housing bubble sent ripples through the industry Monday, with analysts urging a cautious approach to avoid damaging the economy.

Mr. Flaherty told CTV’s Question Period that one thing the government will likely do is increase the minimum down payment on residential mortgages from 5 per cent “to a higher figure.”

The government may also reduce the amortization period from a maximum of 35 years “to something less,” he said.

…

The effect of any move to reduce the maximum amortization period would be difficult to judge. The last time that happened, when the period was reduced from 40 years to 35, “was probably not significant because not a lot of people were going to 40 and we hadn’t had it that long,” Mr. Siegle said.

Meanwhile, Mr. Tal took some comfort from the fact that Mr. Flaherty was not specific as to the size of the increase in down payment and reduction in amortization period the government was considering.

“The trend (on consumer debt) is not extremely positive but the situation is not alarming,” he said.

“I think they’re concerned about the next 12 months and where we will find ourselves a year from now. So they’re trying to be pre-emptive here and basically start to make sure the inflow of new business is of a higher quality.”

“Therefore I don’t expect this to be a huge increase (that would have) … an unreasonable and unnecessary impact.”

I’ve spoken to some other investors today who are a little annoyed that Flaherty isn’t speaking in specifics – i.e. raising minimum downpayments from 5% to 7,5% or 10%, or taking amortization terms from 35 to 30, or 25 – and I concur with them. I would like to see the government give some certainty when they start speaking about changing the rules for buying and investing in real estate, as opposed to speculating about possible changes.

If you are looking at a condo or home that is $200,000, a 5% downpayment is $10,000.  If the minimum downpayment required goes up to 7.5% or 10%, the minimum initial investment required would be $15,000 or $20,000 at 10%. 

If you are looking at buying real estate, whether to live in or as an investment to rent out, I recommend talking to your mortgage professional immediately to lock in loan terms.  Contact me by email or phone (519.772.4376) to discuss finding the right opportunity for you right now.