When most first-time real estate investors start thinking about purchasing an investment property, they start by deciding what the right location would be, what type of property they should buy and how much they could potentially rent it out for. What they don’t always consider is how difficult it could be to qualify for an investment property mortgage in the first place.
“Back in 2007-2008, investors could buy properties with 0 per cent down and 40-year amortizations,” said Jason Friesen, a Toronto mortgage agent at Premiere Mortgage Centre. “Today, some of those same buyers would never qualify for one investment property mortgage, let alone four or five.”
The reason for that is simple: lenders have changed the debt ratio calculations they use to qualify potential investors.
“Only one lender still uses 80 per cent rental offset (meaning that 80 per cent of your rental income for the year is used to offset expenses like your mortgage payment, property taxes and utilities) but more use between 50-70 per cent now,” explained Marc Crossman, an Edmonton mortgage broker with Dominion Lending Centres – Mortgage Mentors.
“Scotiabank recently changed from using 70 per cent offset to 50 per cent inclusion – or add-back (meaning that 50 per cent of your rental income is added to your actual income),” Crossman added. “This is not beneficial for investors, as it can drastically affect how much they will be qualified to borrow.”
On top of the debt ratio calculations changing, so have the rules around down payments. While it states that a non-owner occupied property requires a 20 per cent down payment, some lenders won’t offer financing now unless a buyer can put down 25 per cent.
“TD Bank will finance any rental up to 75 per cent loan-to-value conventionally, and require CMHC insurance for between 75-80 per cent. Laurentian is another lender that does the same. That extra 5 per cent means they won’t be among the lenders of choice and, therefore, won’t get many deals,” Friesen shared.
But maybe that’s what the lenders want. While some lenders have become more aggressive in how they calculate a borrower’s eligibility and affordability, others have dropped out of the investment property mortgage market altogether.
“Lenders are doing anything in their power to not add rental properties to their books, because of the risk involved,” explained Friesen. “Think about it this way: if you had a principal residence mortgage and a rental property mortgage, and something happened that affected your ability to make your mortgage payments, you would want to pay to keep the roof over your head more than the rental.”
Some lenders may also fear that the values of some of these properties are inflated, making these already risky investors an even higher risk.
“Basically, what (brokers are) seeing is the deals that might’ve squeaked through in the past don’t have a chance of getting through now,” said Friesen. “And there’s no way the lending guidelines should have been as lax as they were in 2007 and 2008, so this is not a bad thing at all.”
It is, however, a challenge for brokers who need to manage their clients’ expectations.
“My clients are educated on the things they should/shouldn’t be able to do, when it comes to purchasing an investment property,” said Crossman. “Unfortunately, what’s happening on the ground today is constantly changing.”
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