With ten year mortgage rates recently available with rates at the big banks as low as 3.99% I contacted my lender to inquire about refinancing my portfolio to provide more liquidity, with the objective of making more property acquisitions.
After all, as a reputable top-producing well-established financially-stable realtor in midlife looking to secure his retirement, now would strategically be a good time to extricate some equity from my properties to acquire some more income-generating sites. Why? Because in 20 years the tenants of those acquisitions will have paid off the mortgage debt, and I'll have an additional income stream retirement to ensure a more financially secure quality of life. This is an extension of the strategy explored in our Tales of Upper Hillsborough blog.
And why not?
As a realtor whose income is based on the number and sale prices of the commission-based trades I complete each year, my annual revenue vacillates, as do my expenses. But after being in the business 23 years I'm comfortable with this, as I would like to think that my lending institution - which is one of the Big Five Canadian lenders - would be too.
And, well, they are. Sorta.
As it turns out, all this fear of a real estate bubble has sent many lenders into new cautionary lending practices. And they're not publicly sharing this. However, right now lenders are quietly implementing new unwritten policies and procedures which are making it more difficult to borrow.
My lender came back with a much more restrained re-financing proposal. Hmmmm.
Here are five reasons why it may be harder for you to get mortgage financing:
1. A New Imposed Maximum 75% Loan-to-Value ratio for Condominium Units.
Some lenders are building a cushion for a potential depreciation in the prices of the Toronto Condominium Market. Although I live in a townhouse located in a centrally-located highly coveted boutique Little Italy complex (and not one of those ubiquitous Cityplace or Liberty Village high-rises where a potential over-supply and price depreciation is most likely to occur), the fact that I own a 'condominium' is limiting my re-finance to 75% of its value as opposed to the 80% LTV which an owner of a freehold property can obtain. Furthermore, according to Jake Abramowicz of MortgageJake.com some "mono-line" lenders, which are lenders that only deal through the mortgage broker channel, have even scaled back to 70%. Anything over a 70% LTV they will add a CMHC insurance premium of about 1% to your mortgage. For example, a $300,000 condo at 70% LTV means your financing is $210,000 which, with a 1% premium, adds $2100.00 to that borrowing sum.
2. Some lenders now factor in a monthly payment for secured credit lines with zero balance.
Even if a borrower isn’t using their secured credit facilities, a payment will be factored into their Total Debt Service (TDS) ratio in case they do. Typically, a lender qualifies you based on your total debt for housing, loans, credit cards etc., such that is does not exceed 40% of your annual gross income. Of that, around 32% can be allocated to your housing costs (Gross Debt Service or GDS). For example, if you owe nothing on your $100,000 secured Home Equity Loan Of Credit (HELOC), a minimum monthly payment would still be included in the TDS ratio. Depending on the lender and their guidelines, this could add up to $400/month to the TDS calculation. John Filice, from Invis.ca, says that for a qualified borrower with $50,000 of income and a typical 2.99% mortgage, this could reduce their maximum mortgage qualification amount by roughly $60,000 - $70,000.
3. On revolving unsecured credit, monthly payments are being set at 3% of the outstanding balance.
At all but a handful of lenders, interest-only or minimum payments can no longer be used when qualifying clients. This has quite an impact. Consider that a $15,000 unsecured line of credit has interest-only payments of $75/month. Despite that, lenders routinely want a $450/month payment to be included in the Total Debt Service calculation. Really?
"Yes, Really" says Jake Abramowicz from MortgageJake.com. "When one reviews the fine print on any credit agreements one will find clauses that allow the credit lenders to change the terms and conditions of the agreements at their will. Think back a few years when TD clients were hammered with a prime+.50 charge from straight prime. HELOCs or LOCs or VISA cards etc., are all "open" loans, meaning that rates and terms may change. Closed loans like fixed-term or variable-term mortgages are fixed in term and rate for the time of the contract. So while today you may be paying $75 per month on $15,000 debt but tomorrow, should you miss one payment, your creditor could say "Sorry, but you now owe 3% of the balance and we're adding 10 basis points to your interest rate". The lesson? Read the fine print!
4. Some lenders are 'punishing' the self-employed people with their tighter lending guidelines.
My lender was evasive in how they arrived at the sum they would lend me based on the three most recent Notice Of Assessments I provided. My suspicion is they relied on my lowest earning year of the three - the year I traveled extensively as a reward for twenty years of success. Or perhaps they reduced it by a percentage to anticipate any future slowdown of the market. Regardless, I was disappointed that I, a single entrepreneur with no dependents, a sterling credit rating, modest debt and solid income stream, was pre-approved for a sum that was substantially less than 50% of my total net worth. Huh? This prompted me to point out to my lender that other institutions were spending a lot more energy, times and incentives to win my business, than they were investing to keep my business!
MortgageJake.com says "Credit unions have not been affected by B-20 underwriting guidelines proposed by the Office of the Superintendent of Financial Institutions (OSFI). As a result, a credit union would look at the gross, not net, earnings of self-employed persons. You'll qualify for a lot more funds at interest rates which are similar to those of the "A" lenders. Most lenders who work with people who earn their living on 100% commission - like brokers, realtors and mortgage agents - are always qualified using net income because of all the expense write downs. A sad, but true reality."
Jake goes on to say "What is worse is CMHC's policy on self-employed. Their guidelines state that the maximum someone can be self-employed is for 3 years but the minimum requirement is 2 years. Try finding someone fitting that guideline! Genworth, another mortgage insurer, only considers self-employed people who have cash-flow businesses. If your business has a "cash" component, they'll consider your self-employed income. But if your business doesn't, like a lawyer or doctor, then you're out of luck. Apparently a house-painter is more qualified to Genworth than a self-employed lawyer. Go figure."
5. Appraisers are being more conservative.
Over the past couple of weeks I've had clients completing their own mortgage refinances call me. The appraisals on their properties are coming in for amounts far more conservative that recent comparable sales would suggest. Unfortunately a lender won't provide a copy of the appraisal report to a client even when it's their own property. As a result, it's feasible that the appraisers were relying on different information than I, a realtor with access to the latest sales information in the city, was privy too. However, with over two decades of experience, it's interesting to suddenly be receiving calls of this nature when it's never happened since our real estate boom began over 15 years ago.
Is there collusion between the lenders and Canada Mortgage and Housing Corporation's (CMHC) & the Federal Government's unwritten policy to slow down mortgage lending? Quite possibly. And while these changes may very well protect the overall well-being of our country's economy, shouldn't these practices be made public to consumers?
Jake Abramowicz offers his opinion here. "There is collusion between our voted-in Government (Jim Flaherty, I'm looking at you), Canada Mortgage and Housing Corporation (CMHC), and the Office of the Superintendent of Financial Institutions (OSFI), who recently took charge of CMHC. OSFI is a regulated body whose oversees and regulates the financial industry. And right now, OFSI is tightening lending criteria. CMHC, who has been led by a broker-friendly president, is going to see a change in leadership soon so the future may mean increased minimum down payments, lowered amortization periods and potentially stricter lending criteria for borrowers."
At the end of the day the Government is making good on their message to the public to be careful with borrowing because the boom is over.
We all know that, right?
~ Steven and the urbaneer team