Don R Campbell's Take On The New Mortgage

Real Estate Investment Network: Don R. Campbell's Take On The New Mortgage Changes

What are the intended and unintended consequences of these announcements and what are the details behind the very public announcement? Well they are many and varied.

Let’s start at the beginning with a big (sarcastic) “Thank You Very Much” to all of those people who insist on being speculators by lining up around the block to buy pre-built condos. That is who has brought these changes on to the country’s real investors.

Those who speculate on pre-built condos are just that; speculators. You can equate them to those who speculate on the futures markets around the world. Buying at ‘today’s’ price hoping that the values will be higher in the future so they can sell on. Pork Bellies, Wheat and pre-built condos. That is speculation, not investing. And yes, money can be made doing it if you time it right, know exactly what you are doing and have a “Plan B” when it doesn’t work out. However the downside risk is tremendous as many of these speculators discovered when values took a dip and they couldn’t sell or finance their purchases in 2009.

Diminishing The Line-Ups

These frenzied line-ups are exactly the situations the new ‘investor mortgage’ rule changes are designed to diminish. Yet, the unintended consequences are many and varied. (For instance, I wouldn’t want to be a renter in 2011 and beyond as supply of rental units decreases and demand increases. More analysis on this in the future).

Those also at the effect will be those of us who purchase properties in order to hold for many years and provide rental housing in markets that no rental specific housing is being built. Sadly, under these new rules, we are being painted by the same brush as the speculators.

Lots of Opportunity

That being said, the informed investor knows that within change comes opportunity. This is the first in a many part series on what the changes REALLY are, what is behind them, what details aren’t being discussed and most importantly how to use them to your advantage.

Let’s jump into some of the obvious and less obvious effects of these changes:

1. TDSR RULES CHANGE: The most important (yet not talked about in the media) change is to the CMHC requirements for qualification based on Total Debt Service Ratio calculation. Revised TDSR calculation: now only 50% of the gross rental income from the subject property may be included in the borrower's gross annual income for the purpose of calculating the borrower's TDSR.

Previously, 80% of the gross rental income from all properties was deducted from the total household debt service cost to calculate TDSR. This will be the most dramatic change for investors.

A 50% add-back is significantly less favourable to an investor than an 80% offset. Simply stated if you currently own more than three rental properties, and you are going to try for CMHC financing it will be VERY difficult to qualify for a mortgage using only 50% of the rental income from your portfolio. That is why we are developing solutions for investors and sharing them in great detail. (for instance the use of RRSP financing and Joint Venture relationships will be even more critical than before). This is like going back in time a few years where the informed WIN and the uninformed hit a brick wall.

It is more imperative than ever before to take a big-picture overview of your portfolio and strategically arrange mortgages with the appropriate lenders. For instance, don’t use a ‘investor friendly’ lender to do your personal residence, that would just waste cap room. That is why we are completely revamping the Edmonton ACRE financing portion – and it will be the most important part of the whole weekend (not an overstatement). Whether you have zero properties or 50+ you’ll leave there with actions steps that suite YOUR requirements. We have purposely made the decision to make this a smaller ACRE so you can get more hands-on one-on-one assistance in this critical matter.


2. Increased rents coming. One of the unintended consequences of these rules will be the decrease in the number of rental units hitting the market over the coming 5 years. Currently it does not make economic sense in most regions of the country to build rental specific larger buildings yet the need for rental housing continues to grow (a direct effect of building costs and rent controls). This gap has been filled by investors who have purchased homes, condos, duplexes etc as long term investments. This lack of supply will begin to hit the market at the exact wrong time for renters, as interest rates will have moved upwards (making it more difficult for them to turn into home-owners) and inflation will be back at or above normal (forcing annual rent increases upwards in rent control provinces. Long-term investors, who manage their businesses pro-actively will be the big winners in this scenario. It may not feel like you win under these new rules initially, however watch how supply & demand issues push up not only your values but also your cash flow.

3. Increased Mortgage Fraud. Well, they thought they had issues with mortgage fraud before... sadly these rule changes will push the unsophisticated, uninformed or unscrupulous people into playing in very grey areas just to get mortgages approved. The consequence of this is that as mortgage fraud increases, other rules will change that will affect investors. Watch out for ‘mortgage brokers’ who say they have found loop-holes to get around certain rules. One example you’ll hear will be recommendations to say that you are moving in (when it is obvious your intention is not to do so) just to get it approved at a lower down payment. And believe me they will pitch you very compelling reasons to do so (others are doing it, here’s a ‘legal’ opinion on what constitutes moving in, just stay the weekend and it is moving in) all of which are outright fraud. The only person at the effect when this fraud gets revealed will be you. DO NOT FALL INTO THIS TEMTATION!

4. Increased Multi-Family investing. It has always been easier to arrange financing for multi-family properties (6 units and up) because the properties are treated like the business that they are. The financial institutions have analyzed the properties based on their ability to carry themselves, wherein single-family purchases the borrow is more scrutinized than the property. The rules announced have so far not covered multi-family properties and therefore long-term investors will be moving even more quickly into multi-family purchases. This will NOT add to the number of rental properties (as these buildings already are rental properties) and therefore will not affect #2 above. Watch for our F4 Multi-Family Investment strategies to be updated to give you an advantage in this very profitable area of investing.

There are many more intended and unintended consequences to these changes. As our research continues into what is REAL, we’ll post it in this thread. I suggest that you click on the orange RSS feed link at the bottom of this page so you are automatically sent the updates as they occur.

Please ensure you read the top post in this thread for immediate action steps you should be taking TODAY, not tomorrow. Now is the time to be pro-active in your investing business (whether you own 1 or 50+ properties). Although these changes are slated to take place in April 2010, don’t be surprised if the banks start changing their rules this week in anticipation. That is what they usually do.

Be prepared, be pro-active and choose to win