Canada’s real estate market is in the cross-hairs of a new round of global financial woes. This is a mixed blessing for investors seeking to enter the market.
On the one hand, anxieties regarding the potential for default in Europe and ongoing concern regarding the financial outlook for the U.S. mean lenders have every right to be cautious.
On the other hand, low interest rates give buyers an opportunity to secure cheap financing on real estate, a long-standing hedge again inflation – especially inflation driven by policies designed to stimulate the economy.
Boosting access to credit is no way for governments to eradicate mountains of debt, but for the savvy investor with some cash it could be a way to secure assets as a long-term game should inflation kick in.
“If you have a reasonable down payment and are purchasing a property with decent rents, then get in there – conventional mortgage money is really inexpensive right now,” says Hali Strandlund, president, mortgage investments with Fisgard Capital Corp. in Victoria, B.C. “Values for average single-family homes have declined in most areas but the rents have not. Investors are still able to get really good market rents.”
But lenders are reining in credit, tightening conditions and being less flexible when it comes to discounts on rates. While variable rate mortgages are still available at a discounted rate, the worsening economic news in August prompted many banks to bring discounts closer to prime lending rates – typically from 2% up to the 2.5% range. This led many observers to forecast a shift into fixed-rate mortgages and the greater stability these offer.
Brian Moskowitz, president of Moskowitz Capital Management Inc. in Toronto, worked with one of the country’s major banks prior to launching his own mortgage company, and says banks have several options for tightening credit, all of which impact borrowers.
• increasing credit scores
• reducing loan-to-value ratios on financings
• reducing amortization periods
The federal government led the charge during the 2008 financial crisis when it nixed 40-year mortgages, reducing the maximum amortization period on government-backed mortgages to 35 years and requiring a minimum down payment of 5%.
Ottawa also required that homebuyers have a minimum credit score of 620 and service debt with no more than 45% of their total gross income before it would agree to insure their mortgages.
Ottawa followed those moves earlier this year with a further reduction in the amortization limit on government-backed mortgages to 30 years, and required that any refinancing of a government-backed mortgage tap no more than 85% of the available equity.
The major banks have followed suit, quietly tightening the terms on which they’ll lend to ensure a better quality of borrower, Moskowitz says.
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