‘Cashstop’ for individual investors. Not the meaning we like to see associated with ‘cash-stop’.
There was a time when banks were the primary go-to lender for the Real Estate Investors Broker, through a series of changes over the past couple of years that position has changed radically.
One might suggest that the following changes to guidelines introduced last week for individual real estate investors are the final nail in the coffin as far as the relationship between investors and banks.
Rental Property Financing:
– We are no longer using a 70% rental offset to calculate debt service for rental properties being purchased or all ready owned. Going forward, we will calculate debt service by adding 50% of the rent to income and we will debt service the P&I payment. This applies when the subject property is a rental and also when there are existing rentals owned. We will still need the Rental Worksheet completed, but the offset will not be applied to debt service.
What does the above mean in plain(er) English?
For every $1000 of rental income an investment property generates the difference is as follows;
70% rental offset = ~$160,000 of mortgage money debt serviced.
50%. Add to income = ~$45,000 of mortgage money debt serviced
In other words, in the example above the client would now need another ~$17,500.00 in personal income to qualify for the same mortgage.
Another metric is that for every $1,000.00 of rental income in your file, you will now need to have an additional $17,500.00 of personal income qualify for the same mortgage at Scotiabank this week as what you would have qualified for last week. Many clients will have had an income cushion, but for most this will result in a decline of future applciations
The stringent guidelines will effectively eliminate 75% of applicants who own three or more properties from entering Scotiabank books.
If you currently have investment properties financed at Scotiabank you will not be subject to the revised guidelines for renewals. However if you wished to increase the mortgage amount at the time of renewal that is considered a refinance transaction and would be subject to the new guidelines.
Although the mortgage arrears rates in Canada remain close to 0.35%. extremely low, approximately 75% of the properties that fall into arrears are investment properties, not owner occupied. This may be a small factor in the decision.
Overall it is likely a decision related to allocation of capital. Specifically with regard to how Capital can be deployed in the most profitable, and the safest ways. Clearly the feeling on the banks part is that rental properties were not a highest and best use of their reserves.
Access to money continues to become challenging, in particular for the individual Real Estate investor.
Thank you.
Dustan