High ratio (80%+ LTV) mortgages haven’t been an option for investors since April 19th, 2010 when Jim Flaherty last announced changes to Canadian Lending standards. Again in 2011, we face new rule changes which tighten lending practices yet again.
Lenders now require a minimum down payment of 20% on non-owner occupied purchases, so these new rules wont directly affect the financing options available to real estate investors. Before any further explanation, let’s take a look at what these new changes are.
The 3 Changes
In its Backgrounder: Supporting the long-term stability of Canada’s housing market, the Department of Finance explains each of the pending changes in more detail. Here is the short version:
- Effective March 18, the maximum amortization period on government-backed insured mortgages will be reduced to 30 years from 35 years.
- Also effective March 18, the maximum refinancing amount that a homeowner can borrow against a government-backed insured mortgage will fall to 85% from 90% of the value of the home.
- Finally, effective April 18, the federal government will withdraw its insurance backing on lines of credit secured by homes (e.g., home equity lines of credit or HELOCs).
The Impact
The changes seen in early 2010 requiring 20% as the minimum down payment on non-owner occupied properties mean this year’s rule changes have little direct impact on investors. Instead, the impact of these rule changes will be felt by investors in a more indirect manner. 35yr amortizations will still be an option for investors since we must now use conventional mortgages (less than 80% loan-to-value).
Benefits
Most of the foreseeable impacts will be of benefit to investors.
- Lower Systemic Risk
The 3 changes outlined above are designed to decrease the risk of collapse of our real estate market or entire financial system. In this case the government is playing big brother and forcing its citizens to be more fiscally responsible by decreasing leverage and aggressive borrowing tactics. If this type of policing promotes fiscal responsibility among unsophisticated over-leveraged homeowners that put our entire financial system at risk, this may be a good thing. If preventing Canadians from using their homes as ATMs through continual refinancing prevents an American style housing collapse, this is certainly of benefit to us all. In the game of buy-and-hold, a little price stability is always nice. - Barrier to Home Ownership
The higher monthly costs associated with a shorter amortization periods will serve as a barrier to home ownership for some buyers. Whether or not people can afford a home of their own, they still need a place to live. New barriers to home ownership mean more renters and greater demand for the product we offer as investors – rentals. More demand allows us to select higher quality tenants, and pushes up market rents. Thank you Jim. - No Interest Rate Change
It is no secret that The Bank of Canada is between a rock and a hard place. With rising debt levels here in Canada, our government is looking to promote fiscal responsibility, but increasing borrowing costs will stifle economic growth during our current recovery from “The Great Recession”. This conundrum has led to tactics such as these rule changes which are intended to send a message to Canadians without the broader economic impact of interest rate changes. The introduction of these new rules extends our enjoyment of low interest rates and maintains some extra cash flow for those with variable rate mortgages. - An Artificial Rush
In typical fashion, there will be a rush to “beat” the rules. While likely less significant than last year where more significant mortgage changes were introduced just prior to HST, increased activity in the real estate market between January and March (a typically slow period) helps to stimulate deal flow early in the year.
While most investors tend to resent government intervention, these changes are likely to play in our favour. Thank goodness some changes have finally gone the way of the landlord.
photo credit: Shameless Magazine
