Investment Property Purchases Become More Difficult

On February 16th, Federal Finance Minister Jim Flaherty announced changes to mortgage insurance rules that will come into force on April 19, 2010. These changes are as follows:
1. All borrowers must meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term;
2. The maximum amount one can withdraw in refinancing their mortgage will be reduced to 90% from the current 95% of the value of one's home;
3. Non-owner occupied properties (up to 4-units) will require a minimum down payment of 20%.

There were no changes to down payment requirements or length of amortizations for owner-occupied residences.

Most of the Finance Department’s changes were minor, with one noted exception – that being the rule changes for Canadians wishing to purchase investment, or rental, properties. Mr. Flaherty said he was not targeting real estate investors but rather the “speculators”. Regardless, the new rules will have a negative impact on all investors, especially Canadians that have large real estate portfolios trying to get a conventional mortgage with a lender who uses the Canadian Mortgage & Housing Corporation (CMHC) guidelines. The main reason is not because Canadians will need to have a 20% down payment, but because CMHC will use a 50% add-back instead of an 80% offset. [This refers to different methods of using rental income when calculating debt service ratios.]

Real Estate investors only represent about 4% of the overall mortgage market and those who use high ratio CMHC mortgages for investment properties represent less than half of that. Therefore it will not have a significant impact the broader market. But it will certainly have the appearance of doing so, which was probably the real objective of the government.

It is hard to believe that Canadians could purchase non-owner occupied investment properties with $0 down payment as recently as 18 months ago. Therefore, it is a little baffling for the Federal government to make such a major shift to requiring a 20% down payment. Instead, the government could have tightened up on other conditions such as increasing net worth requirements, increasing credit score minimums, tightening debt servicing guidelines, or limiting the number of insured rental mortgages any one person can qualify for.

Investing in Real Estate, if done wisely, has nearly always been an excellent way for Canadians to improve their Net Worth and Cash Flow. Requiring a 20% down payment will take that opportunity away for many first time investors. The good news is that these new rules will likely be short lived and will be reversed as our economy improves.

James Shinners
President
Mortgage Managers