Its been a while now over over 8 months since the new mortgage rules have been in place and now that we’ve had some first-hand experiences, we thought we’d share some with you.
What we knew?
The new mortgage rules forced individuals to get stress tested at rates 2% higher than the current market rate. Obviously, this was going to hurt first time buyers and reduce purchasing power across the board and it has. Home ownership has become unattainable for more Canadians – we’ll leave it to the politicians and economists to debate if its good or bad. Bottom line is we are going to have less buyers and more renters but as investors we are okay with more renters.
What we missed?
The new rules have had major ramifications for investors. Lenders aren’t just looking to make sure you can cover interest rates 2% higher on the next property you buy. They are looking at every property you currently own adding 2% interest, as well as requiring 1.2 times rental cover (originally it was 1.1 but often lenders would do it without adjustment). Under the old rules an income shortfall could be made-up by your income. Now when an investor has 3 or more properties they won’t use your personal income. For investors in our situation with millions in mortgages across multiple properties, this has been challenging.
For example if you were dealing with CIBC (as all lenders will be slightly different), a $420,000 condo with $2250/month in income that would get a 20% down payment prior to January 1st 2018 would’ve been calculated at 2.7% at today’s rate. That same condo mortgage under the new stress test would require 37.5% down and be calculated at 5.34% interest rate with 1.2 times rental coverage. That is an 87.5% increase in the required deposit!
We went from getting mortgages without an issue based on the income of the property to having a much more challenging situation. Worst of all, don’t think all the equity built up will help you. We just had to close one with over $250,000 in equity based on the appraisal and we still had to provide additional deposits.
– Equity doesn’t matter if you don’t meet the stress test.
4 Ways to deal with the new rules:
- Leave yourself more time – Sounds straight forward, but you are going to have to provide more documentation than you ever had in the past. If you are a little close on certain ratios you are going to need exceptions and those take time to get. Plus, all lenders have to provide way more documentation and it has stressed their organizations – even the big banks under estimated the scope of the rules – and they are all under staffed.
- Work with several lenders – We are not exactly sure why, but we’ve noticed way more variance between what different lenders will offer you. Furthermore, lenders that were great to deal with in 2017 are now under greater scrutiny. It’s always a good idea to work with a mortgage broker and a mobile mortgage specialist at one of the big banks (like CIBC and RBC) that don’t work with the brokers.
- Get into private banking – Typically, you will need assets with the bank in the $1-$2 million range to get in. If it’s an option for you, I would strongly consider it. Mortgages generated through private banking don’t require the stress test and the rates are usually excellent. The only drawback is that you could’ve made more money investing in real estate rather than keeping all that money at the bank.
- Use corporations to structure your holdings – Whether to hold real estate personally or in a corporation has always been a common question investors ask us. The answer has always been situational for the individual, but having properties in a corporation can definitely help navigate around some challenges that come with the new rules. Every situation is different, so definitely consult your financial team.
It’s getting harder to buy multiple properties, but while there is a shortage of supply and increasing demand from both renter and buyers, the outlook is still positive for investors. It’s not going to be as easy as it was before, but with the right strategy and proper preparation investors with a strong team of professionals working with them can survive in any market.