When the federal government changed its mortgage rules back in April 2010, it pulled the rug right out from underneath the feet of many would-be investors.
The golden years in which many Canadians amassed huge portfolios of residential properties by taking advantage of lax government regulations - that at one point, in 2008, permitted buyers to purchase a house with zero money down over a 40-year term - were over.
Investors from thereon would have to scrimp and save to meet the government's stringent requirements, the most challenging of all being the 20% down payment requirement for investment properties.
Many investors now say they're alright with the 20% rule because with house prices as high as they are, that's the only way to ensure a property has positive cash flow. But that's not the case for many beginners.
Sure they want cash flow, too, and of course they need to ensure whichever property they purchase covers the expenses in order to get financing, but their first concern is how to get that first investment property in spite of the tighter lending restrictions.
So CRE has looked into some ways beginners can make their move into residential real estate, even without the full 20% down. 1. Get yourself a new home
The first option you may want to consider is getting yourself a better place. If that sounds like you're straying from the goal of getting an investment property, you're not at all. Instead, you'll be using a convenient way to bypass the 20% down payment requirement altogether, since you'll only need to put 5% down for your new home. That's because even with the mortgage rule changes this year in March, Canadians can purchase a personal residence with just 5% down over a 30-year term.
So once you find a nice, new place, just simply hang on to your last one and rent it out, says Michael Marini, a mortgage broker with Dominion Lending Centres. "It's an easy way for a first-time buyer to get into the rental market with as little as 5% down."
But this cannot be done deliberately, meaning you cannot apply for a mortgage for a principal residence and then immediately rent it out. That would be mortgage fraud, he says.
"It's absolutely illegal for someone to buy a property and indicate that they're going to own/occupy it and then rent it out." If the bank knew that was the buyer's intention, it wouldn't finance the mortgage without a 20% down payment.
"That being said, there's not much a bank can do or even find out about a person who has bought a property, lived in it and a year or two down the road decided that they needed something larger and kept the property to rent out," he says.
So to be on the safe side, this option should only be used if you have owned a home for a while and would like to move into a better one. But don't make the move too soon. Marini says lenders could get a little skittish about supplying more financing to someone who has just gotten a mortgage for a personal residence, then six months later is applying for another one. In fact, the lender might blackball this person altogether.
Since this strategy involves a little bit of a grey area as to how long a homeowner must live in his or her house before moving on, it'd be best to consult your mortgage broker to see if this option can work for you. 2. Go with a HELOC
If you want to keep your home and, instead, purchase an investment property, you will need the full 20% down payment. There are plenty of ways you could come up with these funds if you already have a home. One is a home equity line of credit, known in the industry as a HELOC (pronounced HEE lock). A HELOC works like any line of credit does, but it instead uses the equity in your home as collateral, and as you pay down your mortgage, the limit on your HELOC increases. And like with any line of credit you can withdraw credit and make payments whenever you want.
If you do qualify for a HELOC, the lender will have your home appraised, says Calgary mortgage broker Yousra Johma. "The appraisal is going to confirm the value of your property and the amount of money you can obtain on a secured line of credit." Once approved, the HELOC, like a second mortgage, is then registered behind the first mortgage of your home and is put on title.
The federal government did tighten up the rules for HELOCs earlier this year in March, so now homeowners can only borrow up to 85% of the value of their home, rather than 90%. Still, the option is there to use. But you'll need to directly deal with your bank, lender, or mortgage broker to see if you qualify for a HELOC from your mortgage provider or from a different lending institution.To learn the other five ways you can keep clear the financing hurdle to your next investment property, pick up a copy of our November issue, on newsstands until Nov. 7.
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