By the time you read this, OSFI’s new mortgage stress test will be in full swing, reducing the buying power of Canadians by a projected 15% to 20%. While the new rule will affect all Canadians, regardless of their financial standing, its impact will vary based on individual financial circumstances.
It's important for investors to take this opportunity to pause and re-strategize with their mortgage broker to determine the potential effect the stress test will have on both their borrowing power and their future plans, and discuss an individual action plan for keeping their portfolios going.
Here are five debt and income structuring strategies that should enable you to adjust to the new guidelines. I hope they help open up some borrowing room within your portfolio, allowing it to grow or providing you the chance to take out equity at the best financing terms possible.
Strategy 1: Restructure debts that stand in the way
Outstanding balances on unsecured lines of credit, credit cards or other high-costloan payments – car loans, non-real estaterelated loans – tend to eat into your lending power and could be the difference between qualifying at a bank at the best terms and qualifying with a last-resort trust company.
Clearing out some of these payments/loans through a refinance or a reduction of payment through the use of cash or funds from a secured line of credit (i.e. a line attached to one of your properties) will help improve your debt levels in the eyes of lenders.
Strategy 2: Boost your reported Income
The income you report on your personal tax return plays a major role in not only your\ ability to qualify for mortgages, but also to qualify at good terms.
Clients who own side businesses or are selfemployed should consult with their mortgage broker and accountant about the mortgage benefits versus the taxation costs associated with paying themselves higher personal incomes from their businesses. They should also discuss how much to pay themselves and in what form (dividends, T4, net business income) to enable any future plans relating to equity take-out or purchases under the new guidelines. Further, any rental income received from a property should be fully reported on personal or corporate tax returns.
Strategy 3: Mortgage payment management
Accelerating mortgage pay-down to get rid of debts, particularly on primary residences, is common for many investors. Often we see clients double up their mortgage payments to speed up the paydown. But in some cases – especially under the tightened qualification rules – the higher monthly payment amount would stand in the way of getting the deal approved at reasonable terms or for the full amount the client desires.
My suggestion is to talk to your mortgage broker about alternate methods for paying down your home mortgage in the same amount of time while reducing the higher monthly mortgage obligation that stands in the way of an approval. Options can combine a series of strategies to accomplish the same objective, such as switching from monthly to bi-weekly accelerated payments and making annual lump-sum payments toward the mortgage principal.
It may also make sense to re-amortize some loans to reduce the monthly obligation and help with the debt load. Try to stay away from mortgages with 25-year amortizations unless you absolutely have to; a lower amortization will increase your monthly mortgage payment and eat into your borrowing power.
Strategy 4: Manage revolving line of credit balances
Over the past several years, many investors have relied on existing equity in their properties to buy more and grow their portfolio. This was often done through the setup of secured lines of credit on one or more properties. Secured lines of credit offer the option of an interest-only payment on any funds that investors use.
For example, on a $100,000 loan from a secured line of credit, an interest-only payment is typically about $308 per month.
But in the eyes of a lender – especially A lenders that offer the best terms and rates – the monthly payment is calculated based on the Bank of Canada rate for a 25-year amortization. For the same $100,000 loan, an A lender would calculate that monthly payment at $581 per month.
For some investors, converting a portion of the line of credit from an interest-only payment to a mortgage with a principaland- interest payment would work better from a qualification standpoint. Consult with your mortgage broker regarding the options available to you for such conversion and the percentage you should convert. You should also assess the implications of the new payment on the property’s overall cash flow.
Strategy 5: Maximum utilization of rental income
Lenders vary in terms of the percentage of rental income they utilize during the approval process. The scale ranges from 50% to 100%. You may be receiving $1,500 per month in rent for a particular property, but a lender that uses the 50% methodology would only use $750 of that rent when considering approval. Generally speaking, lenders that use 100% of the rental income are tougher to qualify with or offer more expensive mortgage terms.
As your portfolio grows, structuring a deal to fit the guidelines of lenders that use a higher percentage of your rental income becomes important, as doing so will add more income to your application and help with approval. Your mortgage broker can advise you as to whether your portfolio is at the point where it needs restructuring in order to curry favour with such lenders.
Finding financing for your next investment property will not be as easy as it might have been two years ago, but that’s no reason to despair. Hundreds of thousands of Canadians will still purchase properties this year. There’s no reason you shouldn’t be one of them.
Dalia Barsoum is an award-winning mortgage broker and finance advisor with more than 20 years of experience in the banking sector. She is the winner of CREW’s 2017 Mortgage Broker of the Year Award and is the best-selling author of Canadian Real Estate Investor Financing: 7 Secrets to Getting All the Money You Want. To assess the impact of the lending changes on your investment plans, contact her at [email protected], or learn more at streetwisemortgages.com.
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