Key Changes Over the Past 3 Years
Back in April 2010 investors lost the ability to purchase non-owner occupied properties at with 95% 1st mortgages. It’s still possible to finance investment purchase with less than 20% down, but generally not at the type of rates we were able to get back then (eg. Prime -0.7%). With leverage being one of the primary advantages to investing in real estate, this change really slowed down the acquisition rate for many small investors, myself included.
Another key change at this time was the drop from 95% loan-to-value refinancing on your primary residence to 90% LTV. This has since been restricted further and limits the amount of equity available for investors to put towards their investment portfolio. Using a HELOC is a very popular strategy for rent to own investors who earn great cash flow which is able to easily offset the minimal interest paid to unlock home equity for investment purposes.
The final important change back in April 2010 was that borrowers would have to qualify at the 5 year fixed rate regardless of the term they chose which made it a little tougher to qualify for a mortgage.
Since these major changes in 2010 there have been a few more rounds of mortgage rule changes, each more restrictive than the last.
Potential Changes in 2013
The Office of the Superintendent of Financial Institutions (OSFI) is now looking at the issue of limiting amortizations on conventional mortgages. Currently on a conventional mortgage (those with 20% or more as a down payment) amortizations of up to 35 years are permitted, but proposed changes would see the maximum amortization period reduced to 25 years.
OSFI is still examining this and it could take a little while to trickle down (if it happens at all) but it’s best to know about these sorts of changes early on so you can plan accordingly. Personally, I wish I had more of a heads-up about the April 19th, 2010 round of mortgage changes but they were really a catalyst that got me take action on a couple of deals which have made me great returns over the past 3 years, so I can’t complain too much.
What Will the Impact Be for the Rent to Own Investor?
There are a couple of impacts to the rent to own investor that should be considered, and to illustrate these I will use our latest rent to own opportunity as an example to put things into perspective.
The first impact would be cash flow. The longer the amortization, the lower the mortgage payment, and the higher the cash flow on any given investment opportunity. As an example, here is the estimated cash flow on this $50K investment assuming 3 different amortization periods:
- 35 year = $921/mth cash flow (+$105/mth)
- 30 year = $838/mth cash flow
- 25 year = $733/mth cash flow (-$105/mth)
We normally aim for a 30 year amortization period which is quite attainable these days for most investors. As you can see, reducing the amortization period by 5yrs eats up $105/mth of your cash flow on a $250K home. The difference between 25 and 35 year amortizations is $210/mth which is fairly significant. On the flip side there is more mortgage paydown so the total ROI stays the same but would you rather have that cash flow in your pocket or going towards principal paydown?
The second impact would be mortgage qualifying ability. Right now with a conventional mortgage you can use higher amortization periods which boost your cash flow and make it easier to qualify for mortgages and purchase more rental properties. If you plan to build a portfolio of cash flowing properties these rule changes could make it tougher to qualify for the mortgage financing you need.
What’s the Point of All of This?
These changes may come into effect, or they may not, but there is a clear trend of mortgage rules tightening. The tougher the mortgage rules get, the tougher it is for you to build a portfolio of cash flowing real estate.
The point is that if you’ve been sitting on the fence as I was leading up to the April 19th, 2010 round of mortgage rule changes, maybe now is the time for you to take action.
If you’ve been considering investing in real estate but aren’t sure how to get started, need some great professional contacts to help you evaluate your options, or are sick of being stuck sitting on the fence for any other reason, I’d like to figure out how I can help you get off that fence and start achieving your financial goals in 2013.
Connect with us on social media using the links on the right sidebar if you haven’t already. More importantly get on our RTO Insiders list to make sure you don’t miss out when we release our next great deal. Finally, contact us to setup a time to chat with Andrew by phone or over a cup of coffee. You’ve got nothing to lose, and the seats at Starbucks are far more comfortable than sitting on the fence.