Scotiabank has long been an investor-friendly lender. But recently, Scotia Mortgage Authority (SMA) made its rental financing program notably more restrictive.
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.
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 insuredhigh-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.