There seems to have been a lot of confusion and mild panic over the sudden changes that the ministry of finance made to Canadian mortgage rules all of a sudden on October 3rd, 2016–changes, by the way, they made without consulting the mortgage industry. But that’s another story.
To set the record straight, the main change that affects us investors is the change they made to qualifying for an insured mortgage—that is to say, it mostly only affects people putting down less than 20% down payment on an owner-occupied property. It does not directly affect those applying for a conventional mortgage with 20% down or more that don’t require mortgage insurance.
Now, most of us know that mortgage insurance is usually only required if you are putting down less than 20% when buying a house. Sometimes, lenders and borrowers will require or request mortgage insurance even if they have more than 20% down payment. In an effort to keep things simple, for now, we will only focus on for former—on the effect these changes have on those with less than 20% down payment or what is known as high ratio mortgages.
The change that took effect on October 17th, 2016 was made to the way borrowers with less than 20% down payment are qualified for a mortgage. It used to be that people applying for high ratio mortgages would be qualified using the discounted contract rate as opposed to the higher posted rate provided they were willing to sign a 5-year contract term.
Said in another way, if you have less than 20% down payment, then you must now qualify using the higher Bank of Canada Benchmark Rate.
For example, the Bank of Canada Benchmark Rate is currently 4.64%, while the discounted contract rate may be around 2.59%, let’s say. Someone with only 5% to 19.99% down payment must now qualify based on their ability to pay back a mortgage loan using the higher 4.64% Canada Benchmark Rate.
With a $25,000 down payment and a budget of $1900 per month for principal and interest mortgage payments, that means a person used to be able to buy a $500,000 property under the old rules, but now can only afford to buy a $395,000 property under the new rules.
Up until now, it has been the relatively low cost of borrowing that has caused the consistent rise in real estate prices in most urban centres around Canada, especially in Toronto and Vancouver.
It is the hope of the Canadian government that these rule changes will cool the heated real estate market and help to lessen the effect if there really is a housing market bubble and if said bubble were to burst once and for all.
How does this affect me as an investor?
As a real estate investor looking to personally qualify for a mortgage, this shouldn’t affect you at all—that is, if your strategy has been, and continues to be, to put 20% down on your income property purchases. If this is the case, these rule changes won’t affect you at all.
The people that these rule changes will affect are those hack-investors who are fraudulently claiming their income property purchase as a second home, owner-occupied, so that they can put down only 5%, but then renting it out.
Claiming that a property is for personal use when it is really for rent, just so you can put less money down, is called mortgage fraud. If this has been your strategy, then the new mortgage rule changes will definitely affect you.
If you have 20% down and don’t need mortgage insurance, then these rule changes will not directly affect you one bit. I say the word “directly”, because there are a number of indirect effects that will take place as a result of these changes that are beyond the scope of this article. Don’t worry. These indirect effects are mostly good if you are residential property investor as you’ll see in the next part.
What opportunities does this change present?
As real estate investors, these rule changes are actually pretty darn great:
- It means there will be less “stupid money” floating around the real estate market bidding up property prices.
- It means fewer real estate buyers to compete with when investing in your rent-to-own deals.
- It means more people will have to continue to rent and save for a longer time before buying a property.
- t means potentially more tenant-buyer candidates.
- It means greater demand for your rental units.
- It means lower vacancy rates.
- It means higher market rents.
In short, whenever it becomes more difficult or more expensive to purchase real estate, it presents opportunities for educated investors who have legal creative financing strategies at their disposal to help people become homeowners. It pays to be educated in creative real estate investing strategies. And, if you are reading this, then you are likely one of those educated few who are in a great place to benefit from these mortgage rule changes.