REIN CEO Patrick Francey recently met with REIN Finance Centre's Hugo Dos Reis to discuss the latest updates in the mortgage world. While REIN Finance Centre hasn't seen the mortgage business slow down overall in 2018, it has noticed it has become much more difficult to get a mortgage. According to Hugo, there is a mindset shift that needs to happen - people need to come in, hit the reset button and work with the new rules instead of pushing back at them.
From lender rule changes to tips on how to increase your cash flow, here's everything you need to know to make sure you're ahead of the game:
- REIN Finance Centre's math has shown that new stress test rules introduced on January 1, 2018 have affected people's ability to qualify for a mortgage by about 30%. While this may sound like bad news, Hugo believes it has stabilized things and eliminated people overextending themselves.
- When it comes to financing, what was once normal is no longer normal. Conversations are now focused more on your profile and goals to determine where you need to consolidate and make changes, whereas they used to be more about just getting the best rate. It's increasingly important to be creative with your strategies and work with an advisory team like REIN Finance Centre to help you plan and look into the future.
- There have been a lot of big lender rule changes this year. Most banks are now asking for your T1 generals and statement of real estate summary on mortgage applications. Many people write off expenses to the point that they show a small shortfall on their taxes, but the challenge is that banks need to include these deficits on your application, which can impact your ability to qualify for financing. Hugo suggests going into the 2019 tax season, you should prepare your accounting so you are showing the reality of your portfolio. A healthy surplus is good because while you have to pay taxes on it, if you were showing a shortfall on every property, eventually you would have too many expenses on your profile to qualify for traditional lending.
- IFRS (International Financial Reporting Standards) introduced the IFRS9 rule effective this year, putting more accountability on the banks to ensure the mortgages they hold are clean, properly audited and not overleveraged. This essentially means the banks are now doing more due diligence. For example, if your mortgage is up for renewal, the bank will usually do a soft credit check. If they notice your credit is low or presents additional risk to the bank, they will do a full credit report. Depending on the severity of the situation, in a worst case scenario, they could choose not to renew with you. REIN Finance Centre has only seen this happen a couple of times this year, but according to Hugo, "it is a reality that seems to be creeping in."
- So what if you recently lost your job or have poor credit and are coming up for renewal? REIN Finance Centre suggests taking advantage of the early renewal options available at your bank. If you know this could potentially be a problem for you, doing an early renewal eliminates your risk altogether.
- If you have a large portfolio, good credit and properties that cash flow but you no longer qualify at the bank, you should consider pursuing non-traditional financing options. Some B lenders only charge 0.5% to 1.0% more than the best interest rate, which could be an option for you to buy more properties.
- Typically B lenders also charge you a one-time fee. On average, the fee is 1%, so you would pay $4000 on a $400,000 loan. According to Hugo, as long as the math works, this shouldn't dissuade you from buying real estate with a B lender. He is confident any real estate should appreciate at least $4000 over a few years.
- Private lending is also an option, but the rate is much higher at around 7.99% to 12%. However, while the rate is higher, they have interest only payments, which means sometimes the payment isn't as much as you would expect. Private lenders also charge a fee, which is usually around 1.5% to 3% or more of the loan amount.
- If you don't meet the requirements on the A side, there are many options on the B side that shouldn't be brushed off without consideration. Private lending is more so for those who have no income, poor credit or a limited down payment. They are a good short-term option, such as for flips, construction financing or for someone who wants to get in on the market and that is their one-year timeline.
- What if you have a 25 or 30 year mortgage that's down to 15 years and you want to extend it back out to 30 years so your payments go down and your cash flow goes up? Refinancing can unlock equity and reduce your payments. This can make your portfolio look more attractive and hopefully help you buy more properties. The challenge is that some people don't want to pay off their mortgage over 30 years and would rather do it in less time. It is recommended to keep your monthly payment as low as possible, but if you want to accelerate it, you can introduce an optimal monthly payment. Most banks will let you automate it, and this will keep your amortization where you need it to be and reduce your monthly pay on your credit bureau. According to Hugo, this is an easy trick to help you access more funding.
It's important to regularly review your financing and make sure you're staying up to date on what's happening in the mortgage world. If you haven't had a discussion with someone, take advantage of the resources available at REIN and connect with REIN Finance Centre. It could help you get back into the market or perhaps even save you thousands of dollars.