I’m sure you’ve all heard about the Federal Government’s January 17th change to CMHC mortgage rules by now (and I missed blogging about it, shame on me). They take effect on March 18th, and there’s one great strategy I’ll share to get some killer deals if you’re out shopping for more real estate right now. Here’s the gist of the mortgage rule changes (via CMT):

1. A 30-year maximum amortization on insured mortgages over 80% LTV
2. An 85% LTV limit on insured refinances
3. Elimination of government insurance on secured lines of credit (aka., HELOCs)

Now there’s going to be some consequences out of this, as always, both intended and unintended. Don Campbell from REIN had a great discussion on his Facebook wall about what those might be, and I’ll summarize them here.

Bank of Canada rate won’t have to rise as quickly

A bunch of ‘panic’ sellers will hit the market in Jan/Feb

A number of home buyers will push to close before new rules (not understanding that most banks will adopt rules immediately)

‎Combined with the recent CREA/MLS agreement will lead to increased listings

Cash flowing properties will become even more important

More Speculators will be kept out of market – capping price increases on new [construction]

More renters will stay renting

Now, notice the two points of Don’s which I’ve bolded. This means there’ll be people, both listed right now, and who will list even more quickly, who want to get their current home sold and their new home bought before March 18th. If you can find the right people, have your financing sorted, can close quickly and (most importantly) have a good Realtor and Lawyer who can get you through this, there’s a great opportunity to solve some people’s problems, and get a good discount for doing it.

The basic idea is this: buy their house with as short a closing as possible. Transfer the title and do all the normal stuff you do to take possession, but let the sellers stay in the property until (for example) March 1st. This gives them up to an additional 6-7 weeks in which to find and buy their new home. I spoke with a mortgage broker this afternoon and the mini-rush hasn’t pushed their time-lines much, so even if you need financing, you should be able to close in 10-14 days, if you have a good broker and lawyer.

Here’s the breakdown:

Step 1: Find good sellers motivated by the new rules

Your Realtor can help you do this by searching for attributes like recently changed listings which dropped their possession requirements or added negotiable. Price drops or comments in the private (Realtor only) notes like commission bonuses can also flag people who are hoping to get out now and use the 35 year amortization for their new property.

Step 2: Establish rapport, understand where they’re going

Your job (and your Realtor’s job) is to find people who were going to be tight qualifying for the house they want to buy, and wanted to get through with the new financing before they’re limited to a 30 year amortization. You’re going to help them solve that problem by buying their house with a quick close, but not forcing them to move. The balance is between the best discount you can get for solving their problem, but still leaving enough on the table for them to be able to buy the new house they want.

Step 3: Write offer with lease-back agreement

You’ll need to get your lawyer on board up front, but this isn’t an uncommon practice and shouldn’t be hard (or expensive) to do. You absolutely want to make sure you’ve got your legal butt covered, in case (for example) the house burns down the day after closing. You’ve gotta be clear about the cost of staying, who has insurance, damage deposit etc, and also make sure the lenders are cool with what’s going on.

Step 4: Do it!

This part is pretty self explanatory. You write the offer, it gets accepted. You close. They go shopping. They offer and close, then move. Everyone’s happy and you’ve both been able to take advantage of the last of the 35 year mortgages!

If you have any questions, or want to work with a Realtor who gets this stuff, leave a comment, use the contact form or feel free to give me a call. 780-488-4000.

Warning: This one can be tricky and should be used by experienced homebuyers, investors and always consult the appropriate industry professionals. In this case this includes your Realtor, Mortgage Broker or Banker and always your Lawyer.

(HT to Wade Fenner who put the bug in my ear about this earlier today.)

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Surprising no one, the Bank of Canada chose not to raise interest rates yesterday, maintaining the benchmark overnight rate at 1%, which makes the banks’ prime rate 3%.

From the BoC press release:

The recovery in Canada is proceeding at a moderate pace, although economic activity in the second half of 2010 appears slightly weaker than the Bank projected in its October Monetary Policy Report. In the third quarter, household spending was stronger than the Bank had anticipated and growth in business investment was robust. However, net exports were weaker than projected and continued to exert a significant drag on growth. This underlines a previously-identified risk that a combination of disappointing productivity performance and persistent strength in the Canadian dollar could dampen the expected recovery of net exports.

Aptly summarized by Canada Mortgage Trends:

• Global economic “risks have increased”
• “…pressures affecting prices remain largely unchanged”
• Today’s decision “leaves considerable monetary stimulus in place”
• “In the third quarter, household spending was stronger than the Bank had anticipated and growth in business investment was robust.”
• “…net exports were weaker than projected and continued to exert a significant drag on growth”

This is good news for investors and people considering a new home purchase. The fundamentals underlying the recovery in Canada are very strong, and global forces causing the recovery to stretch out a bit will help keep interest rates down longer, with less pressure on inflation.

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As many expected, the Bank of Canada raised rates 0.25%, making the overnight rate 1%. Most banks followed suit, making the prime rate 3%.

Here’s the high points from the press release (via Canadian Mortgage Trends)

“…Consumption growth is expected to remain solid and business investment to rise strongly.”

“The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected…”

“…Financial conditions in Canada have tightened modestly but remain exceptionally stimulative.”

“Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.”

I posted a quick survey the day before the announcement, and here’s what people thought would happen.

It’s a difference of $13 on every $100,000 of mortgage, which is chump change. These are some screaming low rates, and there’s been talk about how the global economy will be growing at a little bit slower pace moving forwards, which also means we’re not as likely to see double-digit interest rates in the near future.

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There’s been some great material at the last few REIN meetings about mortgages, particularly timely given the Bank of Canada’s decision to raise prime.

Don Campbell was on BNN, CBC, Alberta Primetime and a couple others talking about the best way to approach the coming rate hikes. Watch the video or scroll under to get the quick skinny.

The best option is to stay variable and make optional payments to bring your payment level up to the same level as the fixed rate payments. It’ll save you tens of thousands of dollars.

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I had an awesome question via Twitter from Ben Arledge, a REIN member and web developer.

Thoughts on life/disability insurance on rental property?

To which I replied:

Not worth it, better do deal with a real insurance broker and get the right insurance. You don’t buy a happy meal for the toy.

His next question is the important one.

What’s the “right” insurance? I’m considering no life or disability insurance, just normal home/landlord ins. Yay or nay?

I’m a fan of term life insurance, and you can get the same coverage for less than what the lender is offering you.

There’s a good discussion in the legal section of myREINspace about just why it’s better, but the story (via Rob Lungren) is essentially this:

Not only is mortgage insurance offered by the banks more expensive, it only pays out the balance of the mortgage direct to the lender. So as you pay off the principle the return on your insurance payment actually goes down.

I chose to purchase extra term life insurance (enough to cover paying off balance of mortgages). In the event of my untimely demise my wife (or kids) gets paid out full amount and they can then pay off the mortgages and keep the difference.

For instance, lets say I take out $500,000 mortgage insurance with the lender and I pass away in five years. If $20,000 has been paid down on the mortgages, $480,000 gets paid out to the lender and my family holds title free & clear.

If I purchase term, my family gets paid out the $500,000, they can choose to pay off the remaining $500,000 and keep the remaining $20,000. Or they can also choose to pay off a portion and keep more, but they now control the situation, not the lender. And it’s less expensive!

Now, a properly cash-flowing investment property should be no burden, except for possibly capital gains owing at the time of death due to the transfer, but that’s a question for your accountant.

However, how much life insurance you wish to have beyond that is an important topic you need to discuss with your family. My father in law died suddenly in 2007, and I had a chance to see first hand how important and helpful well bought life insurance can be.

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Peter Kinch’s email newsletter just hit my inbox this afternoon and it’s got some great info I thought I’d share. (Peter’s a great mortgage broker and I’ve used his office in the past.)

Here’s what he had to say:

It’s rare to see a big bank undercut its mortgage competitors publicly. Most of the time they do it stealthily with “discretionary rates” that are only offered to the bank’s best customers. Not this time.

BMO has declared war with a new 3.75% five-year fixed rate. The other big banks are advertising 4.09% for their “special offer” rates. BMO’s promo, however, is 0.34% lower, and a juicy 1.64% off posted rates!

The move is a clear play for market share and it will, no doubt, shake the other banks. If other lenders match, it will leave them with just a 121 basis point spread above five-year bond yields. That’s uncomfortably below the 135 bps minimum they usually like to see.

As expected, the Bank of Canada kept its target for the overnight rate at 0.25% yesterday.

The ongoing global economic recovery is being driven largely by strong domestic demand growth in many emerging-market economies and supported in advanced economies by exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.

The level of economic activity in Canada has been slightly higher than the Bank had projected in its January Monetary Policy Report (MPR). The economy grew at an annual rate of 5% in the fourth quarter of 2009, spurred by vigorous domestic spending and further recovery in exports.

The underlying factors supporting Canada’s recovery are largely unchanged – policy stimulus, increased confidence, improved financial conditions, global growth and higher terms of trade. At the same time, the persistent strength of the Canadian dollar and the low absolute level of US demand continue to act as significant drags on economic activity in Canada.

Core inflation has been slightly firmer than projected, the result of both transitory factors and the higher level of economic activity. The outlook for inflation should continue to reflect the combined influences of stronger domestic demand, slowing wage growth and overall excess supply.

Housing starts rebounded in the second half of 2009 and will strengthen in 2010, according to CMHC’s first quarter Housing Market Outlook, Canada Edition.

Following a total of 149,081 units in 2009, housing starts are expected to be in the range of 152,000 to 189,300 units in 2010, with a point forecast of 171,250 units. In 2011, housing starts will be in the range of 156,400 to 205,600 units, with a point forecast of 175,150 units.

“Canadian housing markets will benefit from improving economic conditions and low mortgage rates,” said Bob Dugan, Chief Economist for CMHC. “As well, measures recently announced by the Government of Canada to support the long-term stability of Canada’s housing market will help moderate housing activity as some potential buyers will have to save a larger down payment or consider a less expensive home.”

Dugan also noted that the existing home market has shifted from a buyers’ market, at the beginning of 2009, to a sellers’ market. The relative lack of new listings for existing homes has pushed some of the demand into the new home market, which helps explain the forecast for higher housing starts activity in 2010.

The Canadian economy expanded by a greater-than-expected 5% in the fourth quarter, raising the likelihood of interest rate hikes later this year.

The country’s gross domestic product grew at the fastest annualized pace since the third quarter of 2000, Statistics Canada said Monday.

The economy’s burst boosts the odds of a string of rate hikes in the second half of the year.

“This report shouts strength, and increases the odds the Bank of Canada will begin to hike interest rates in July and stay on that path in the following decisions,” said Douglas Porter, Deputy Chief Economist at BMO.

The February RBC Canadian Consumer Outlook Index rose three points to 109 from 106 in January, as consumers were more positive about their outlook for the Canadian economy.

This is the highest level the index has reached since it was established in November 2009.

While Canadians remain divided when considering the overall state of the economy, the balance has shifted into positive territory with 53% of Canadians describing the economy as good and 47% describing it as bad in February. In January, 52% described the Canadian economy as bad, while 48% described it as good.

If you want more updates from Peter, go sign up for their mortgage newsletter. If you need a broker, give them a call. If you say I sent you then I’ll get an exciting Rona gift card. (/sarcasam)

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For those of you who caught yesterday’s changes to CMHC’s lending rules, here is Peter Kinch (Canada’s #1 Mortgage broker) weighing in on the topic. I agree with him, the changes are good window dressing, but will have very little impact on the market.

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You’ve heard it by now, Government of Canada Takes Action to Strengthen Housing Financing. It’s no surprise and will have minimal impact on the market. There’ll be a little rush, then a little hangover, and then back to normal. I am glad to see some action taken to stop the stupid pre-sale condo speculation, but I’m sad to see it come at the expense of experienced investors. I think it will cause rents to rise in the medium term, most likely in areas of explosive growth (i.e. oil patch) where investors are needed to quickly make units for an already stressed rental market.

Does anyone know if the other mortgage insurers are following suit? (e.g. Genworth, AIG)

Canadian Mortgage Trends had a great write up of the announcement.

These new rules apply to government-backed insured mortgages only.

The Good:  5-Year Fixed Qualification Rates

• The New Rule: Borrowers will need to qualify using a 5-year fixed rate regardless of what term they choose.  If you want a 1.95% variable rate, for example, you will need to show that you can afford payments at a higher fixed rate, like 4.09%.
• The Government’s Reasoning: “This initiative will help Canadians prepare for higher interest rates in the future.”
• The Effect: It will now be harder to qualify for a variable-rate mortgage, but not much harder. Most lenders already use three- or five-year mortgage rates to calculate a borrower’s debt service ratios.  For many discount lenders, this means the qualifying rate will go from something like 3.25% to 3.89%—not a huge difference.
• The Verdict: A sound and necessary change–although many lenders already use similar guidelines.

The Bad:  90% Maximum Refinancing

• The New Rule: No longer will you be able to refinance your home to 95% of it’s value. 90% will be the new refinance maximum.
• The Government’s Reasoning: “This will help ensure home ownership is a more effective way to save.”
• The Effect: Borrowers will be less able to pay off high-interest debt with lower-cost mortgage money.  On the upside, this rule has the positive effect of keeping equity in the home (which is quite helpful when home prices fall). It also discourages homeowners from relying on home equity to bail themselves out when they accumulate debt.
• The Verdict: Bad…for people who need to restructure debt in an effort to pay more principal and less interest.  On the other hand, a 90% refinance limit is beneficial in that it deters people from racking up debt and using their homes as a proverbial ATM machine.

The Ugly:  80% Maximum Insured Financing On Rentals

• The New Rule: People buying non-owner occupied rental properties will need to put down 20% to get an insured mortgage, versus 5% previously.
• The Government’s Reasoning: To reduce speculation.
• The Effect: The number of investors creating rental housing will drop notably. Investors will need to borrow down payment funds elsewhere (assuming it’s allowed) or use higher-cost non-insured lenders (like TDFS) to get 90% financing. Note: This rule does not apply to multi-unit owner-occupied homes with rental units (like duplexes and triplexes).
• The Verdict: Ugly.  How the government can go from 100% rental financing (17 months ago) to 80% today is confounding. The intent is understandable, but the government could have increased net worth requirements, increased Beacon minimums, tightened debt servicing guidelines, or limited the number of insured rental mortgages a person can qualify for. Instead, the solution was near-draconian, and it will have an effect on the rental stock in Canada. Will it cause a material rise in rents?  That’s a tough call, but it will definitely reduce the supply of rental units and limit Canadians’ investment options.

What to Expect:

• Undoubtedly there will be a rush of applications to beat the April 19 deadline.
• The government says “Exceptions would be allowed after April 19 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.”
• The 80% rental rule will crush the income property financing business for some lenders and brokers.

There’s also a good discussion in myREINspace about the mortgage changes here, here and here.

What this will mean for experienced investors is moving a little slower, and slightly reduced ROI’s at this point in time. It’ll also mean a little bit more work to ensure appropriate leverage.

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I’ve got a lot of friends who are buying their first homes right now. We go out for coffee and people are talking about how big they’re trying to make their down payment, or how quick they can manage to pay off their mortgage. That’s great, and I’m glad they’re being fiscally responsible.

I’m looking for a very different mortgage than they are. I’m looking for the smallest down payment, lowest monthly payments (interest-only if I can get it) and the longest amortization possible.

Why? I have different goals.

Normal people plan to work, pay off their house, work some more, retire and pray that they’ll have a pension or some savings.

I’m buying three bedroom houses in Edmonton that I can rent for more than my expenses. If I can do a quick $10k reno on the way in, so much the better. If the market does nothing I still make ~$10k/year per property, and worst case, when I go to retire the tenant will have paid off the mortgage.

That’s why I went for a low-down insured mortgage with a 35 year amortization for the townhouse Megan and I are moving into.

Different goals, different mortgage.

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Call everyone on your team.

Your real estate team.

Get your mind out of the gutter.

I’m in the middle of buying a new principle residence and almost made one of the most deadly, amateurish mistakes in the history of time: removing conditions without making sure they’ve actually been satisfied.

In my case I recently returned to a job and most people in new jobs don’t have a payment history or they’re on probation or something. You can be pretty much certain that the bank is going to call your employer. My broker had sent me a commitment from the lender and I thought we were good to go, so I removed conditions. I didn’t realize that the lender hadn’t called my employer yet. If something had been wrong or the HR people said they were about to fire me, my mortgage would have disappeared and we would have been screwed.

If you wave the conditions of purchase (a.k.a. go unconditional) and your mortgage falls through, you’re screwed. At the very least you’ll lose several thousand dollars worth of deposit and at worst you’ll be forced to complete the contract. Now, if you do lose the mortgage you’ve lined up, there are usually alternatives, both with regular lenders and with secondary lenders. It’s much simpler to follow one simple rule:

Before you go unconditional, call all the members of your team and make sure you’re good to go. Get it in writing from your mortgage broker/banker.

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