by: Benjamin Bach
I’ve been hearing rumours recently that CMHC was changing their financing criteria for real estate investment properties.
Over the last couple of weeks, we’ve heard about raising the minimum downpayment that an investor would need to put down on a rental property (that wasn’t owner-occupied, meaning the owner or a close relative was living there), and that rates will be heading up come July 2010.
This week I’ve learnt that CMHC is also likely planning to, effective April 19, 2010, change things a whole lots more for Real Estate Investment in Canada.
Rental Offsets
Currently when you buy a rental property, CMHC will allow you to use a 80% rental offset, which means that they used to take 80% of the gross rental income that the income property generated, and subtract that from the borrowers total debt, to establish the total debt service (TDS) ratio.
What that means is that you don’t have to have the household income to cover 100% of the value of the rental property, like you do with a home you live in, because the bank will let you offset the debt using 80% of the revenue the rental produces (does that make sense?).
They’re tentatively changing this amount to 50%, which makes it much tougher for people to qualify for investment properties, but the real kicker is that…
CMHC is also changing how they evaluate the current debt and income on your existing rental portfolio – they are treating the rental income here the same as other non-salaried income too, meaning your current portfolio, while it generates cash flow every month, might hinder the growth of your portfolio going forward.
We also think that most lenders are going to adopt these standards, even for non high ratio loans that are not CMHC insured, just to be cautious.
Bottom Line
If you qualify under today’s standards for a loan for 1 or 2 townhouses that you planned to rent out and hold as long term assets, come April 19, under New Mortgage Rules you may no longer qualify for them. Let’s talk before then so you know all of your options.
PS – if we have an agreement of purchase and sale (a real estate contract) dated before April 19, and the mortgage is approved, the rental property can close after (they may set a timeframe, contact me for full details). You don’t have to complete the purchase by April 19, just have the contract written and accepted.
If you’d like to talk to a mortgage broker to explore your options, I can recommend one who does a lot of work with real estate investors.
Leave me a comment below with any questions, and please contact me for more information at 519-772-4376 or via email at Benjamin@BenjaminBach.com.
