For a take on these changes we spoke with mortgage planner, speaker, and author, Peter Kinch. Peter was the top Canadian broker in 2008 by volume, according to Canadian Mortgage Professional Magazine, and is a major participant in the rental financing market.
CMT: Peter, Thanks for joining us. Let’s start with an obvious question: Were these changes to insured rental property mortgages really necessary?
Peter: The majority of the (Finance Department’s) changes were superficial, with one noted exception – that being the change in rules for rental properties. Were they necessary? I don’t think so. Was it good optics for the government? Yes.
Mr. Flaherty stated he was not targeting the investor, but rather the ‘speculator’ – but the results of the new rule will be extremely negative for all investors. The main reason is not because they need to put down 20%, (I have been counselling my clients to do that for years), but because CMHC will now use a 50% add-back instead of an 80% offset. [This refers to how lenders allow rental income to be used in debt service calculations.]
This will have a dramatic impact on clients with large portfolios trying to get a conventional mortgage with a lender who uses CMHC guidelines.
Was all this necessary? Not really; real estate investors only represent roughly 4% of the overall mortgage market, and those who take high ratio mortgages in this sandbox represent less than half of that. So it will not have the effect of changing the broader market. But it will certainly have the appearance of doing so – which I believe was the larger objective of the government.
CMT: Given all the new qualification hurdles, is there any reason borrowers would want an insured rental mortgage at 80% loan-to-value when they can simply get a conventional uninsured rental mortgage?
Peter: Obviously the first choice of any borrower would be to go conventional in light of the new rules. The challenge will now become ‘cap space’. As the conventional sources dry up, and the balance sheet lenders become more restrictive with their rental property guidelines, more and more borrowers will get ‘capped out’ at their bank and will have no choice but to use an insured lender for some of their mortgages.
It will become more important now, than ever before, for investors to be strategic about the order in which they choose their lenders.
CMT: What effect will these rules have on the volumes of mortgage professionals that specialize in rental financing?
Peter: There is no doubt that the less experienced brokers will be dramatically impacted by these rules. The single biggest issue will not be on volumes so much as the amount of increased effort and work that will go into finding a home for investors with larger portfolios.
CMT: What kind of rush do you expect from people submitting refinance and rental deals before the April 19 rule implementation?
Peter: I don’t believe the percentage of people refinancing up to 95% was large, so I don’t expect any rush on this particular rule change. The biggest rush will be on investors wanting to utilize the (current) 80% rental offset policy.
CMT: Will any lenders benefit in any way from these rule changes?
Peter: To a certain extent, yes – but the real question is, do they have the appetite for it? Do they want to benefit from it? Again, as I said previously, any investor with only one or two rental properties will still have multiple choices, but those with multiple units will soon run into cap space issues due to having fewer options. I do see TD as one of the main benefactors, however. Another benefactor will be private lenders who will step in to fill the void.
CMT: What options remain for investors who don’t have 20% to put down on a rental property?
Peter: Really, they only have two options.
They can make use of a private lender, or one of the few remaining sub prime options (such as Optimum), as long as the property still cash flows; or,
They can learn how to attract joint venture capital and find a partner to go in on the purchase with them.
More On Peter Kinch:In 2008, Peter Kinch was rated the top volume-producing mortgage broker in Canada by CMP magazine. He is one of the largest, if not the largest, rental financing brokers in the country. Peter specializes in educating and assisting Canadians in building their real estate portfolios, and is co-author of the best selling book, 97 Tips for Canadian Real Estate Investors. Peter’s second book, “The Canadian Real Estate Action Plan,” is planned for May. In 2009, Peter partnered with Dominion Lending Centres (DLC) to create a national network of brokers trained by Peter to work with real estate investors. Peter specializes in consulting with investors from a portfolio perspective rather than a “transactional” one.
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