Scotiabank has long been an investor-friendly lender. But recently, Scotia Mortgage Authority (SMA) made its rental financing program notably more restrictive.
SMA now:
- Limits borrowers to five rental properties, including those financed elsewhere (there was no official limit previously)
- Restricts rental mortgages to 5-year closed terms (fixed or variable)
- Upcharges the rate for rental deals (whereas before it didn’t)
On a positive note, SMA says it has loosened its net worth requirement on rental applications (which is now 10% of each property’s value, up to $50,000 per property).
David Stafford, Managing Director, Real Estate Secured Lending, told us about Scotia’s logic in making these changes.
He attributed the guidelines decision to five factors:
- “The additional work required to underwrite multiple investment properties, which grows with the number of properties and, in turn, may impede service levels on other deals in the queue;
- The fact that over a certain number (of units), the credit is no longer a typical retail underwriting exercise and becomes a cash flow assessment;
- As a multi-faceted full service FI, there are other arms of the bank that are better suited to larger property management business credits;
- A very small number of customers will be affected;
- The vast majority of these deals are booked into one of the 5-year products and it’s simply easier to manage the portfolio in a narrower range of products.”
David says that, other than the net worth policy, these changes have only been implemented at Scotia Mortgage Authority. That’s where “the scale and pace of the business is most affected by these more complex credits,” he said. We take that to mean Scotia’s retail sales force isn’t restricted by most of these new rules. (Brokers won’t be too excited by that.)
As a side note, brokers get concerned when lenders tighten policies out of the blue and no one knows why. Even if we don’t like our lending partners’ decisions, it’s nice when lenders care enough to be transparent and spell out their reasoning. As such, we appreciate David taking the time to explain these new guidelines.
Other Implications
To help digest this news further, we spoke with Toronto-based rental financing expert and top broker, Calum Ross, of Mortgage Professionals Inc.
Apart from the reasoning above, Calum says the changes may also be risk-driven.
“There is a growing concern that there is a potentially unhealthy demand for residential real estate investments,” he said.
“The changes signal a clear indication that Scotiabank has a decreased appetite for real estate investors who have significant exposure to the residential real estate investment market.”
“People will generally allow themselves to become delinquent on (default on) investment property mortgage payments before they will allow themselves to default on their principal residence mortgage payments—for the simple reason that people put priority on basic shelter needs.”
“Clearly having one of the biggest mortgage lenders in the country tightening up credit to this group is not good news for the segment in the short term.”
On the other hand, Calum doubts that SMA’s move will cause a “serious supply side shock” for those seeking brokered rental financing. He cites three reasons for that:
- As David suggested above, investors who have six or more investment properties are “few and far between,” says Calum.
- A number of banks, such as CIBC, National Bank, and many specialty mortgage lenders, are still happy to finance the deals that SMA will no longer formally entertain.
- If market demand for rental lending remains unmet, he says: “I firmly believe it will bring in new market entrants…or a revision (loosening) of other mortgage lenders’ credit policies.”
With respect to SMA limiting rental mortgages to 5-year terms, Calum suspects this will also “curb the tendency of some real estate investors to regularly refinance their property holdings.” He says active investors often refinance to gain access to built-up equity, and then leverage that equity further.
The Bigger Picture
When rental options shrink, it sometimes takes a bit more creativity to get deals done. While this news is nowhere near as impactful to brokers as the elimination of insured high-ratio rental financing in April 2010, Scotia is nonetheless a key rental lender. These changes will therefore be felt by brokers who deal with large portfolio investors.
Ironically, Calum says the tightening of lending rules may actually increase business for the decreasing number of mortgage professionals who “competently understand the broader-based financial planning principals” of serving investors.
For the widest array of rental financing choices, Calum says it behooves investors to use mortgage professionals that are “intimately familiar with cash flow and lending principals specific to real estate investors.”
That’s decent advice because rental financing (especially large portfolio rental financing) is a specialized practice for brokers. It’s hard enough to stay on top of lenders’ owner-occupied rates and policies, let alone track and memorize the countless rental terms and guidelines.
For that reason, if you plan to finance more than a few rental properties, you owe it to yourself to seek out a rental financing specialist.
Rob McLister, CMT
I think it’s a clear strategy action that banks are taking to restrict lending to capable to repay borrowers.
If that’s the goal, I really like it.
It appears to me that Scotiabank is simply streamlining their processes when it comes to these kinds of borrowers. Risk assessment is a lot more work for the lender (much of it manually) when assessing a borrowers multiple property portfolio.
Spoke to a Scotia road warrior and apparently these restrictions don’t apply to them only the broker side. Could anyone confirm this. are we treated as second class citizens again?
The only relevant point I see here is that “these changes have only been implemented at Scotia Mortgage Authority.”
Their real intention is to force large RE portfolio (more than 5 units) to deal with their private wealth management division, where they will offer better rates and products that are available, like inter alia credit lines with no penalty discharges…and then they hit them up for investments, business accounts, cards,….
Another reason for brokers to focus business on mono line lenders.
Most of the Mono line lenders won’t do deals with multiple existing rentals, or they will do it with tough conditions (ie no deal if a rental shows a deficit). The broker channel is now the primarry source of mortgages for Scotia, the leaders and decision makers have a great opinion of the broker channel, it’s a major contributor to the bank’s success on the retail side. In a perfect world, it would still be like it was for years but in real life, an underwriter is not productive when stuck in a multi-rentals deal.
Scotia just increased LTV on BFS STEPs to 75% in the broker channel. I view that as a broker friendly move. For the longest time, only its retail channel was allowed to go above 50% LTV.
Here is your answer: “David says that, other than the net worth policy, these changes have only been implemented at Scotia Mortgage Authority.”
this is not good for brokers. our days are numbered
:) pessimists usually never succeed.
John…… LMAO
Yup might as well shut the business
down now, Scotia changed their policies,
Brokers are done for!!! pffftttt
I don’t even remember the last deal my
office sent through to Scotia Bank.
Observer is correct in saying, “Pessimists usually never succeed.” Too many of these fly by night Brokers who use to make $10.00 per hour, flying by the seat of their pants, hoping to make a million!