Flaherty to toughen mortgage rules, investment properties targeted

[fumbrunner]

QUOTE (fumbrunner @ Feb 17 2010, 12:16 PM) Wow, if this is the case it will severely impact the serial investor. 50% is completely unreasonable given the actual costs of managing a property.


Man, the more I read this the worse it gets.  From the mortgage trends link:


This is a biggy if you want to buy rental properties. CMHC is changing how rental income is used in a borrower’s debt service calculations (TDS formula).
Previously, CMHC allowed 80% of the gross rental income from all rental properties to be deducted from the total household debt service cost when calculating the TDS ratio.
Effective April 19, “50% of the gross rental income from the subject property may be included into the borrower’s gross annual income for the purposes of calculating the borrower’s TDS ratio.”
Rental income for all other rental properties will be treated the same as regular non-salaried income. Borrowers will need to prove rental income. That will be done “using the average income for the previous two-year period from line 150 of the borrower’s two most recent CRA NOAs.” Borrowers will be able to “gross up” the non-salaried portion of that line 150 income by 15%.
In practice, lenders may instead simply choose to rely on line 126 (“Rental Income&#8221 on the borrower’s tax return.


_________________

So, in essence the 50% offset applies to the property in question only.  The balance of your properties are treated as regular income.  Of course, we all take steps to reduce this income to as low to 0 as possible.  Therefore, you lose that income in calculating income for debt servicing except for the amount you claim in your income tax.  How will CCA be treated here?  

Ugh, ugly indeed.

 

[ChrisDavies]

QUOTE (wealthyboomer @ Feb 18 2010, 01:09 AM) What is your source for this info?

Comment discussion on Canadian Mortgage Trends blog from another mortgage broker.

 

[fumbrunner]

QUOTE (ChrisDavies @ Feb 18 2010, 05:31 PM) Comment discussion on Canadian Mortgage Trends blog from another mortgage broker.

Chris, take a look at my post above.  It applies to the subject property only and not all your properties.

 

[RobMacdonald]

I haven`t been able to determine what 5 year rate the banks will be using and I think we probably won`t for a bit.

I`ve also heard about the new qualifying criteria using a 50% addback rather than the 80% offset. I also have been unable to verify the source, so I`m hoping it`s only speculation. Keep in mind, this only will apply to mortgage applications going through CMHC. I would be very surprised if the the non-securitized lenders changed their requirements for conventional lending on rental properties.

This potential change will severely affect real estate investors that have a portfolio, but are trying to finance their residence through CMHC or Genworth. It will be very difficult to qualify using a 50% addback if you have several rental properties.

The other affect this will have will be to essentially remove a few more lenders from rental property financing. Lenders like Merix, Street Capital that require securitization by CMHC on their conventional portfolio, will have to underwrite using the new rules.

 

[fumbrunner]

QUOTE (RobMacdonald @ Feb 18 2010, 05:36 PM) I`ve also heard about the new qualifying criteria using a 50% addback rather than the 80% offset. I also have been unable to verify the source, so I`m hoping it`s only speculation. Keep in mind, this only will apply to mortgage applications going through CMHC. I would be very surprised if the the non-securitized lenders changed their requirements for conventional lending on rental properties. 

Let`s hope so.  Most of my deals do not go through CMHC.  If lenders follow their lead, it`s going to put the breaks on virtually all rental purchases (well except those that could finance 100% on their own).  Time to give my bank manager a call...

 

[kanabel]

Does anybody know what is April 19, deadline for? Pre-qualifying, qualifying, submitting mortgage application, signing mortgage docs, having an offer accepted or finally possession? What is the breaking point?

Thanks
Dejan

 

[Gen1GT]

QUOTE (fumbrunner @ Feb 18 2010, 06:50 PM) Let`s hope so. Most of my deals do not go through CMHC. If lenders follow their lead, it`s going to put the breaks on virtually all rental purchases (well except those that could finance 100% on their own). Time to give my bank manager a call...

Forgive my ignorance, but how does having to put 20% down put the breaks on most rental purchases?

 

[Nir]

QUOTE (Gen1GT @ Feb 19 2010, 04:53 AM) Forgive my ignorance, but how does having to put 20% down put the breaks on most rental purchases?example:
An investor has 100K cash. with the 10% minimum down he could buy two 4-plexes for 500K each.
With the new 20% down rule he can now only purchase one 4-plex for 500K.

They can both still JV etc. but the portion that does not have such options is affected as shown above.

Regards.

 

[kanabel]

QUOTE (investmart @ Feb 19 2010, 05:10 AM) example: An investor has 100K cash. with the 10% minimum down he could by two 4-plexes for 500K each.
With the new 20% down rule he can now only purchase one 4-plex for 500K.

They can both still JV etc. but the portion that does not have such options is affected as shown above.

Regards.

That`s right. Assuming properties CASH FLOW, this move will significantly reduce advance of small investors like myself, in the early stages of investing (6 doors over 3 properties) with limited cash on board. Furthermore, instead of paying 20% down, why not paying 10% down, and remainder could go to reserve fund instead, which will allow still some cash on the side. That would help healthy portfolio too, and if cash not used later from reserve could finance another property.
Also, if 5% down remains for home buyers, what is the cheering about that rents will go much higher? I don`t believe 5-year fixed condition will really stop them from buying their home, and speculators (who are in small percentages anyway) will certainly not become renters, if you conclude most of them probably already own a home, as they are purchasing additional condos for flipping (some of them will still be putting 20% down). Maybe I am missing the point as many advocate here herds of renters when new rules come up.
In addition, if 50% addback on rentals and 10% down for home buyers introduced later, that would certainly cripple prices and mortgage industry.
Just my 2c

Dejan

 

[fumbrunner]

Actually, the ratios are the larger issue than the 20% down. Assume that you have 5 properties that rent for 5000 a month. The previous tds formula allowed you to use 80% of that. If you had properties with outstanding cashflow, it rewarded owners in terms of your tds. With the new ratio, they are potentially looking at tax returns - a much different way of looking at things since all investors take steps to reduce their taxable rental income as much as possible, including the application of cca.

 

[kanabel]

QUOTE (fumbrunner @ Feb 19 2010, 08:00 AM) Actually, the ratios are the larger issue than the 20% down. Assume that you have 5 properties that rent for 5000 a month. The previous tds formula allowed you to use 80% of that. If you had properties with outstanding cashflow, it rewarded owners in terms of your tds. With the new ratio, they are potentially looking at tax returns - a much different way of looking at things since all investors take steps to reduce their taxable rental income as much as possible, including the application of cca.

Is that confirmed?

 

[fumbrunner]

QUOTE (kanabel @ Feb 19 2010, 10:37 AM) Is that confirmed?

It was cited in the blog.  I save sent an email to a broker that I have worked with in the past.  Will let you know the results.

 

[Gen1GT]

QUOTE (investmart @ Feb 19 2010, 07:10 AM) example: An investor has 100K cash. with the 10% minimum down he could buy two 4-plexes for 500K each.
With the new 20% down rule he can now only purchase one 4-plex for 500K.

They can both still JV etc. but the portion that does not have such options is affected as shown above.

Regards.

Sounds like a quick tap of the brakes, rather than impending lockup. Instead of buying one 4-plex, that $100K can buy two 5-plexes for $500K each.

...or am I misinterpreting the new rules?

 

[RussellWestcott]

You might want to check out Don R. Campbell`s unique take on this issue.

He has posted some of his thoughts ... click here

 

[fumbrunner]

QUOTE (fumbrunner @ Feb 19 2010, 09:00 AM) Actually, the ratios are the larger issue than the 20% down. Assume that you have 5 properties that rent for 5000 a month. The previous tds formula allowed you to use 80% of that. If you had properties with outstanding cashflow, it rewarded owners in terms of your tds. With the new ratio, they are potentially looking at tax returns - a much different way of looking at things since all investors take steps to reduce their taxable rental income as much as possible, including the application of cca.

Just did a quick calculation on my status of the current and future TDS calculations. I actually go from a NEGATIVE TDSR to over 50%. That gives you some insight of how ridiculous the new calculation is.

 

[kanabel]

QUOTE (fumbrunner @ Feb 22 2010, 02:34 PM) Just did a quick calculation on my status of the current and future TDS calculations. I actually go from a NEGATIVE TDSR to over 50%. That gives you some insight of how ridiculous the new calculation is.

How do you get to that percentage, that transfers you from negative to over 50% in the future?

 

[fumbrunner]

QUOTE (kanabel @ Feb 22 2010, 09:23 PM) How do you get to that percentage, that transfers you from negative to over 50% in the future?

The previous (current) calculation is PITH for all properties plus all debt obligations minus 80% of rents divided by gross annual income.  My 80% of rents exceeds my PITH+debt obligations, resulting in a negative number in the top half of the equation.


The new calculation will be (i suspect) PITH for all properties plus all debt obligations divided by gross annual income (including rental income) +50% of rents from subject property.  I my situation, it would leave me at around 50% if I was to purchase a property similar to my other holdings.

If that ratio is correct, it will bring back the 3-4 property wall for investors in terms of financing.

 

[Nir]

QUOTE (fumbrunner @ Feb 22 2010, 11:56 PM) divided by gross annual income (including rental income)Is it not actually divided by gross annual income (including 80% of* rental income)?

*or a different percent but not 100%(?)

Thanks.

 

[fumbrunner]

QUOTE (investmart @ Feb 23 2010, 05:11 AM) Is it not actually divided by gross annual income (including 80% of* rental income)?

*or a different percent but not 100%(?)

Thanks.

It sounds like they will be using your gross income from your NOA or tax return. Therefore, it is whatever you claim including your salaried income plus your NET rental income.

 

[Nir]

QUOTE (fumbrunner @ Feb 23 2010, 08:45 AM) It sounds like they will be using your gross income from your NOA or tax return. Therefore, it is whatever you claim including your salaried income plus your NET rental income.


Thanks.