With new mortgage rules in effect and regulators closely monitoring credit policy in Canada, there has been much conversation about the impact on real estate prices and how much the changes will slow the pace of residential real estate appreciation. Only time will tell how regional based foreign home buyer taxes, tougher mortgage rules, and growing uncertainty about global economics will impact our market. One thing I know for sure is that Canada has some of the world’s best social, political, and economic policies protecting our national standard of living. At the same time, I have become increasingly concerned about the adverse implications to strategic real estate investors by the speculative crowd.
While I remain very optimistic about long term appreciation for real estate investors buying positive cash flowing properties in markets that possess strong economic fundamentals, I am convinced that lenders must return to the more normalized lending practice of charging an interest rate premium for investment properties for two key economic reasons:
- Lender Risk and Risk Adjusted Returns – while a lender who lends to a client with a strong balance sheet (broadly defined as liquid assets outside of real estate) who is buying a positive cash flowing property in a stable metropolitan area likely has little risk of default, there is still no question that there is a greater default risk than with the mortgage on someone’s principal residence. Put simply – consumers who find themselves under financial duress will default on their tenants before they compromise their own shelter. This is basic human survival, and the fact that mortgage interest rates were the same for non-owner occupied and owner-occupied borrowing has never made sense – this was an anomaly that investors like me enjoyed but knew shouldn’t have ever happened. Expect this non-owner occupied interest rate premium to return and expect lenders to scrutinize real estate investor’s non-real estate holdings at a much greater level. I fully support rental financing policy that requires $50K or more of liquid investments (cash or marketable securities) for all investment property loans.
- Cost of Capital Changes and Mortgage Lender Capital Reserves – with the changes to the federal mortgage default insurance guidelines (both bulk insurance and hi-ratio insurance), funding sources for investment properties have just become more expensive and there is bound to be less competition as mortgage lenders see both their cost of funds increase and funding sources decrease simultaneously. We don’t need to be financial and strategy experts to know that competition brings down prices, and that any business that sees a decrease to their profit margin in a specific segment will in time pass more of the costs to the end user or leave the segment. Real estate investment lending won’t disappear since there is a need for rental housing, but the cost of borrowing in this segment will need to adjust in the near term. Some adjustments will be short lived – but please accept that they are coming.
Another key area of concern and future rental property financing storm can be found in the Toronto and Vancouver condo markets. Condo financing has simply become too high a risk with some estimates placing pre-construction investor buying at as high as 50%. This is a potential disaster waiting to happen, in my opinion. Many of these properties do not cash flow which means that CRA could disallow the interest deduction and many of the new wave of condos closing in 2019 may not ever be able to get financing given today’s materially higher rates and significantly tougher mortgage rules. In many cases the rates these people got approved at are long expired, the mortgage rules they qualified on don’t exist, and big banks and ‘A-lenders’ have understandable pulled away. Simply put – lenders are not interested in lending to real estate investors who are overleveraged and without other assets to keep payments on track in a shifting real estate market.
Before you finish reading this and think the sky is falling – remember every cloud has a silver lining. Every time there are credit or capital market rule changes and/or even moderate drops in real estate or equity market values, there are retail investors who panic. Never forget that panic creates market opportunities for people who remain calm and composed, and who stay informed. Cash is king in a recession and falling real estate values create a buyer’s market – which is when the smart money buy.
I have watched many of my clients and business contacts make a lot of money buying when the subprime crisis brought down equity and real estate markets in 2008 and make quick profits on the Brexit surprise swing vote, and let’s not forget the volatility we are seeing in the US Market as what some are calling ‘the worlds most watched reality TV show’ airs across global markets. It came to air in 2016 and is scheduled to air through until 2020 – it is changing global macroeconomics at an unprecedented rate.
Before you get caught up in the sensationalized media belief that the sky is falling – take action! If you have an investment property that you are consider refinancing – do it now. I guarantee you that neither investment property interest rates discounts, loan-to-value limits, nor lending guidelines will get better in the next 6-18 months.
No mortgage or financial planning team in this country does more borrowing to invest or borrowing for wealth creation than our team. We have the business track record and formal education to support your plan and to help you achieve your financial goals. Volatile markets create opportunities and we would love the opportunity to help you capitalize. Call our office today to discuss how we can help at 1-855-410-9905 or email firstname.lastname@example.org