The State of Rental Financing



Last November the Department of Finance banned default insurance on single-family rentals. That was a near-knockout blow to the rental financing businesses of lenders who rely on securitization.

Since then, lenders who compete with the big banks have been forced to find new balance sheet funding. The extra cost of that funding has led a majority of lenders to jack up their rental rates by 15-25 bps. That’s up to $2,300 more interest that folks must now pay on a $200,000 rental mortgage.

Or do they?

While the rental businesses struggle at monoline lenders, some of the largest banks are apparently giving regular residential rates to many of their renewing rental borrowers. That’s a big problem for brokers, who often have no way of matching those rates.

It’s also a problem for consumers, who face a loss of competition in the rental financing market. They now have fewer cost-effective alternatives to the major banks, whose products often entail higher early breakage penalties. (Banks can’t be blamed for the Department of Finance’s actions so this is merely an observation, not a jab against them.)

What Now?

“I think transactional based brokers without a measurable value add—who are not differentiating themselves—are in big trouble, full stop,” says Calum Ross, broker and author of The Real Estate Retirement Plan.

But Ross says the challenges are far less of an issue for brokers “who offer full service financial planning and integrate the [rental] property into the [client’s] larger financial plan.”

“If you don’t have a clear value proposition, you are a commodity and commodities get used for price,” he says, adding that the new environment is destined to “cull the herd” of brokers. “The fact is, a more competitive [rental financing] market will cut margins and force us all to improve our game.”

Rental financing professionals must be able to demonstrate their ability to save clients more than that 15-25 basis points, he says. That amounts to just 10-15 bps on an after-tax basis since most investors tend to be at higher marginal tax rates.

But the challenges don’t end there. With anecdotal reports of broker-channel banks tightening up their internal rental financing criteria, rental lending options could continue to shrink in the “A” market. Brokers who specialize in income property financing may have to get increasingly comfortable with non-prime alternatives.

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Comments

  1. Comment avatar

    whatdoiknow    

    Another perfect example of the double standard. Banks have always….and will always find ways to circumvent policies. Fact is…whomever regulates them have no teeth and could care less! They spend millions on politicians…and you brokers are so fragmented; makes for easy pickings.

     
    1. Jake Abramowicz    

      The banks are not circumventing policies. They are merely taking advantage of an opportunity in the market.

       
      Comment avatar
      1. Comment avatar

        whatdoiknow    

        @Jake…do you read much? breathe in…and read…then comprehend.
        @nothing…really? so…when a bank finances someone with ZERO income at 75% LTV on a condo on leased land….that is ok right? when a bank finances a home with 75% LTV with ZERO income from a “student” and a blind eye on the DP..that is ok too right? so the banks don’t need to disclose how their reps are “rated” based on the discount or lack of they give to clients (while you brokers are going to be soon) and that is ok too right?

        you are “nothing” because you really know nothing. that is abundantly clear.

        So tell me….who regulates the banks? How is it funded? From whom?

         
        1. Get the jokers off this site    

          whatdoiknow, meet reality.

          OSFI prohibits banks from financing borrowers with zero income at 75% LTV, let alone on a condo on leased land. Someone must be able to service that mortgage or it won’t get approved.

          If you’re going to spew this crap you should probably do it on a site not frequented by mortgage professionals. That way maybe no one will call you on your BS.

           
          Comment avatar
    2. Nothing    

      You don’t know who regulates banks but you assert they have no teeth.

      I have named myself in honour of your question, “What do I know?”

       
      Comment avatar
      1. Comment avatar

        whatdoiknow    

        ..and u do? tell me…who, how they are funded and from whom.

        i know…crickets…..

         
        1. whatdoiknow    

          @joker…please stop drinking the cool aid; you really don’t know anything.

          FACT: OFSI cannot “prohibit or stop” a bank from doing shady crap. Unless someone reports that crap to OFSI, they could care less. You think the bank would report their own dirty laundry to a regulator funded by……whom again?

          Can you tell me with a straight face that banks do not and would never ever turn a blind eye on “policy” in order to get a deal done?

          Your ignorance is making it easy for me to troll you.

           
          Comment avatar
  2. Comment avatar

    Jim Tourloukis, Advent Mortgage    

    This is the world in which we live today. The banks have every right to price their products in such a way that gets them the highest yield. If that means adding a 25bps premium to the broker channel rental deals, there is not much we as brokers can do. The banks are just doing what they should be doing – adding the highest shareholder value that they can. We all would be doing the exact same thing if we were in their position. It just so happens that us brokers are now at the wrong end of the business. To Calum s point, unless you add value to your investor clients in some way, you are a sitting duck as the client will just walk across the street to a branch and pay bps less (as they should). I know I would if I were an investor and you provided nothing but rate.

     
    1. Robert McLister    

      Thx Jim,

      Re: “We all would be doing the exact same thing if we were in their position.”

      101% true

       
      Comment avatar
  3. Comment avatar

    Ron Butler    

    Sometimes this stuff is just laughable. While I completely agree that the brokers who specialize in servicing rental investors need specialization, lots of experience and in-depth knowledge the concept that mystical, secret financial planning magically motivates intelligent purchasers to accept 20 bps higher rates than the rates the banks are cheerfully offering seems a bit much. If our rental specialist brethren create so much “added value” why don’t they charge a fee for their incredible planning and send the client to the CIBC to get the lowest rate? Like I said some of this is bit hard to buy into. Another interesting fact is that the “transactional brokers” which I can only guess is code for “discount online brokers” are actually the group that has experiences the highest volume growth among all mortgage brokers in the last 24 months. That is not me saying it that is what the lending bosses tell me. .

     
  4. Comment avatar

    Calum Ross    

    My model is unique and it is definitely not for everyone. You simply couldn’t replicate our model without formal personal finance training. It requires team members in the advisory capacity to have degrees in accounting, finance, or MBA with a formal financial planning designation as well as understanding of the investment securities market. Borrowing to invest clients are much tougher to acquire, take much more knowledge to serve, and they are incredibly loyal. My average clients is already a multi-millionaire with a multiple six figure household income.

    When we on-board new clients we teach and apply the six key components of the financial planning process, and we create an authentic long term relationship by identifying the strengths and weaknesses of their financial situation with strategies to close those gaps.

    Transactional is not used as a codeword for rate sites or any other type of mortgage origination. It specifically means someone who is handling a transaction and not integrating the mortgage into the short and long term financial plan and seeking a long term relationship with that borrower. For clients looking to fulfill a transaction – there is no question rate sites are a very logical place to go. As a matter of fact – I refer 5-10 people to rate sites every month.

    For someone looking for a well trained professional to look after their debt needs as part of a holistic wealth management approach, they would be best served by someone taking a relational approach with the formal training and track record to back it up.

     
    1. Tomas    

      Calum,

      What’s the annual pre-tax, unlevered return your clients achieve using your model?

       
      Comment avatar
  5. Comment avatar

    Harold    

    I just had a MCAP renewal specialist tell me that if I shop around for a firm pre-approval at a lower rate, he will match it ! Talk about ethics. Why would I do that to another lender?

     

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