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Any thoughts on the proposed changes to RE/mortgages?

http://www.globeinvestor.com/servlet/story/GI.20100216.escenic_1469432/GIStory/

1. Anyone applying for a new mortgage has to qualify for a current 5-year fixed rate, which is 5.390% instead of the absurd 1.8%-2.25% currently being offered.
2. Ottawa will cap refinancings which qualify for CMHC insurance at 90% of home value, down from 95%.
3. Increase the minimum downpayment for getting insurance on a spec house to 20%, up from 5%.


IMO hoembuyers should qualify for the current 5 year anyways, thats how a prudent lender should lend when there is unprecedented low rates, assuming they want to get paid back.

I don't think #2 will have much of an impact. And if it is my tax dollars that would be used to bail out CMHC, then for speculative purposes (#3), 25% down seems more reasonable.

Karl Denninger has an opinion too: http://market-ticker.denninger.net/
 

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I'm generally opposed to governments interfering in the financial matters of Canadians, but ...

Since I've seen so many stories, over the years, of people who spend lavishly on things that they cannot afford, I can only assume that there exists a (large) percentage of the population which is utterly incompetent when it comes to planning their own finances.

Flaherty's rules are designed to protect these people from their own stupidity. (And that, I guess, is a good thing.)
 

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Very good move by the FM.
Now the next thing is for bank, lenders and brokers to actually enforce it and not find ways around it.
Not sure if this will control the raging RE madness but it is a prudent move nevertheless.
The fact that Jim Flaherty said In introducing the tougher mortgage requirements, Mr. Flaherty said there was "no clear evidence" of a real estate bubble in this country sounds to me like they (his govt.) are fully aware that there is a RE bubble and these are their first steps to control it.

It shouldn't affect most folks who are in control of their finances but will affect RE flippers (esp. condo flippers) the most.
 

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I like the changes too. Despite the poorly handled income trust tax policy reversal (*cough*), this is an example of adroit manoevring on Flaherty's part. Acknowledge the bubble by not acknowledging the bubble.

Hopefully this will cool things down a tiny bit, although I don't have my hopes up.
 

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Not sure if i like the part about 20% down for an investment property - i was thinking of buying a property, renting out and perhaps flipping it. 20% down, means for a typical property $300000, i would have to put down $60K in addition to closing costs etc. Seems a huge jump from $15K + closing costs....
I'd also be interested in seeing the impact this has on the downtown condo market in Toronto - should slow down toronto downtown market by quite a bit as i'd imagine there is a lot of speculation going on.
 

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It's still not enough. The 30 & 35 year mortgages are still the big problem. They are keeping prices up artificially high. If we allowed 50 year mortgages, house prices would probably double from where they are rather quickly. Conversely, reduce it back to 25 years and house prices will follow back towards reality.
It's good that they did something about the housing bubble, but more needs to be done in my opinion.

I think if more people understood the role the CMHC plays in this whole thing, they would be screaming for changes and tighter restrictions on lending.
 

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Not sure if i like the part about 20% down for an investment property - i was thinking of buying a property, renting out and perhaps flipping it. 20% down, means for a typical property $300000, i would have to put down $60K in addition to closing costs etc. Seems a huge jump from $15K + closing costs....
I'd also be interested in seeing the impact this has on the downtown condo market in Toronto - should slow down toronto downtown market by quite a bit as i'd imagine there is a lot of speculation going on.
Looks like the new rules are already having an impact on the people they were intended to impact.
 

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I also wrote about it today New Mortgage Rules: Good or Bad?

I think overall it was a nice attempt, but highly doubt it will do much. There were no real changes for new home buyers except that they have to qualify based on a five year fixed rate. I think they needed to increase the minimum down payment from 5% and only this would have slowed down the bubble. Most lenders were already using 5 year fixed rate to calculate the debt ratios.

The 20% down payment for investors is way too extreme and unnecessary.

The only thing I like the the change in loan to value to 90% this will create some buffer and potentially reduce possible default rates.

Overall it was a nice attempt, but not very effective.
 

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20% down, means for a typical property $300000, i would have to put down $60K in addition to closing costs etc. Seems a huge jump from $15K + closing costs....
I dunno, I think that this is probably the smartest change of them all.

- investing loans often have very strict loan:collateral ratios, so requiring a 5:1 loan:collateral ratio for an investment property doesn't seem unreasonable to me. More than anything, it's a move to protect the lenders (and, the greater banking industry) from a collapse in asset prices like we saw in the US. 1

- I can't count the number of people I've met over the years who've said to me: "Investing? No way, that stuff is way too complicated!", but then go on to explain how they own 3 highly-leveraged rental properties, and how they're thinking of adding a fourth. People who don't know anything about investing shouldn't be holding stupidly-leveraged positions in any asset, imo.


K.

1. Maybe "collateral" isn't the best phrase to describe how I'm thinking about this, since I suppose that renters could always offer their other (presumably, better-paid-off) homes as collateral. But from people I've spoken to, the banks seem to waive typical debt/service ratio requirements for people investing in rental homes, and this strikes me as what the finance minister is trying to crack down on.
 

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I personally do not know any investors that don't put 20%-25% down on their investment properties.

And not to mention they only count 50% of the rental income.

Commercial Property is even more onerous with 2/3 down usually and 6% interest rates are not unusual (though I have seen 4.75% on 10 year mortgage)

So I'm not really sure what they are doing. I guess this will affect like 5% of buyers :confused:

You know if they really wanted to do something for BUYERS they would decrease the amortization period. But these mortgages are extremely lucrative for the lenders.
 

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You know if they really wanted to do something for BUYERS they would decrease the amortization period. But these mortgages are extremely lucrative for the lenders.
I totally agree.
Amortization should be 25 years or less.
Ideally, 20 years.
At the same time, they can't clamp down on the RE industry either.
There is an entire cross-section of professionals depending on this industry, from mortgage brokers, RE agents, appraisers, etc.
If they were to take a pin to this bubble <cough><cough>, a lot of folks would be upset.
 

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Many investors will be unimpressed with the effect the new 20% rule will have on their ROI. Using Financeguru's example, if you put $15k down on a $300,000 property and earn $5k cash flow per year, your return is 33%. If you put $30k down on the same property, your return becomes 16.6%. Ouch!

This new rule also means investors can purchase fewer properties. Instead of using that $30k downpayment to purchase two investment properties, you can only purchase one. More risk concentrated on fewer tenants and fewer locations.
 

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Many investors will be unimpressed with the effect the new 20% rule will have on their ROI. Using Financeguru's example, if you put $15k down on a $300,000 property and earn $5k cash flow per year, your return is 33%. If you put $30k down on the same property, your return becomes 16.6%. Ouch!

This new rule also means investors can purchase fewer properties. Instead of using that $30k downpayment to purchase two investment properties, you can only purchase one. More risk concentrated on fewer tenants and fewer locations.
If that turns out to be true, I would say the policy has been successful!
BTW, in your example, I don't understand how your "return" is any less just because you put more down payment.
More down payment means more equity to begin with and less time to pay off the mortgage on the investment.
It shouldn't change your return at all - if anything your return should be better because you pay less interest overall.
 

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I don't understand how your "return" is any less just because you put more down payment.
More down payment means more equity to begin with and less time to pay off the mortgage on the investment.
It shouldn't change your return at all - if anything your return should be better because you pay less interest overall.
Your return is measured against the actual cash you have invested in the property, not the equity you have. Think of it as a dividend yield. If you pay $10 for a stock with a $1 dividend, your return is 10%. If you have to pay $12 for that stock and the dividend remains at $1 your return is now 8.3%.

So, if you pay $30k to get into a property your return on investment will be lower than if you pay $15k to get into the same property.

You are right that the mortgage payment will be lower with the higher downpayment, but not enough to offset the extra $15k of initial investment.
 

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Your return is measured against the actual cash you have invested in the property, not the equity you have. Think of it as a dividend yield. If you pay $10 for a stock with a $1 dividend, your return is 10%. If you have to pay $12 for that stock and the dividend remains at $1 your return is now 8.3%.

So, if you pay $30k to get into a property your return on investment will be lower than if you pay $15k to get into the same property.

You are right that the mortgage payment will be lower with the higher downpayment, but not enough to offset the extra $15k of initial investment.
So RE investment return is calculated differently than other leveraged investments?
You still have to pay off the mortgage on the property at some point...if you made lower downpayment, the interest paid will be higher over the amortization period.
Therefore, lower returns overall.
Less interest means more money in your pocket.

I think you are looking purely at the cash flow perspective, not the true return on your investment.
By considering only the cash flow and ignoring the interest paid out of your income, you are overestimating the true return on your investment.
 

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You still have to pay off the mortgage on the property at some point...if you made lower downpayment, the interest paid will be higher over the amortization period.
Therefore, lower returns overall.
Less interest means more money in your pocket..
Yes, but the interest is a tax deduction against the income. Also, the tenants pay the mortgage off for me. In fact, when considering the ROI on an investment property, investors also consider the reduction in mortgage balance each year in their calculations. So, If you invest $15k, earn $5k in cash flow and the mortgage has been reduced by $2k through normal payments, the ROI would be 46.6%. This is called cash-on-cash-plus. The interest is already included in this calculation as it is paid with the mortgage payment each month.

My goal as a real estate investor is to tie up as little money as I can in each property and still have it be cash-flow-positive and well-maintained.

I think you are looking purely at the cash flow perspective, not the true return on your investment.
Most real estate investors focus on the cash flow. Any appreciation of the property is the "icing on the cake". Even if the property does not appreciate, as long as the mortgage is being paid down by the rental income, the investor comes out ahead.
 

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This new rule also means investors can purchase fewer properties. Instead of using that $30k downpayment to purchase two investment properties, you can only purchase one.
In the corporate world, the leverage ratio (debt to equity) and its interplay with the amount of risk to which the company is exposed have a real impact on the company's credit rating, ability to borrow, and cost of borrowing.

For individuals buying investment property, due to competition for volume by mortgage providers and the distortive role of government-sponsored mortgage insurance, this is not true. For a solid credit rating individual, the only difference in cost of borrowing due to leverage has been whether you need to pay for mortgage insurance or not.

Because this link between risk and cost of borrowing doesn't work the way it should, there is a need for bright-line limits. Might be even better to break the constraints that prevent the link from existing, but that isn't in the cards. So tweaking the limit is the only feasible solution - we limit the leverage.

...you can only purchase one. More risk concentrated on fewer tenants and fewer locations.
You are right that your vacancy risk (and credit risk from your tenants) is less diversified. However, your market risk exposure is much reduced and so your total risk exposure is less.
 

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It's interesting that by and large (not 100%) on this board we agree that the new limits are not unreasonable - i.e., we generally agree that situations that go past these limits are dangerous.

Where perspectives differ is how often this situations were happening, and therefore how big a change this really is and what impact it will have on the market.

If this sweeps the rug out from the markets, we will know there was really a speculative bubble. And while it might be painful, it had to come down. If it just slightly moderates growth, then it means there really isn't that huge a bubble - a bit of overexuberance. 30 or 35 year amortizations, while painful, aren't really that harmful if we're not in a speculative bubble.
 
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