Big lenders are tightening their requirements for real estate investors, mortgage brokers say, which could further slow activity in places such as Southern Ontario where investor demand had driven up prices and sales.
Bank of Nova Scotia, for example, is no longer allowing home buyers to use funds from a home equity line of credit for a down payment on a rental property, according to a memo the bank sent to mortgage brokers.
“For them to say, you can’t even use money in a home equity line of credit, that is a pretty big thing in our business,” said Dave Butler, principal broker with Butler Mortgage Inc., who works with real estate investors and is one of many who received an e-mail from Scotiabank announcing the changes.
Using a home equity line of credit to buy a rental property has been a common strategy for real estate investors with good credit.
Scotiabank did not comment on questions about the tighter lending standard. But a spokesman said the bank continues to work with its customers to make the right investment decisions for their portfolios while staying within its risk-appetite guidelines.
Other big lenders have become stricter with their due diligence, according to brokers, as the coronavirus crisis pummels the Canadian economy, leading to business closings and the loss of more than three million jobs since mid-March.
Before the pandemic hit, home sales in Southern Ontario and parts of Quebec and British Columbia had been soaring. The average selling price of a residential property was increasing in the suburbs and smaller municipalities as investors sought deals in cheaper markets.
But now home sales have dropped across the country. The Toronto region, the country’s biggest market, sank 67 per cent in April compared with last year, because of the economic downturn combined with physical distancing measures and health concerns.
“Banks are tightening up their real estate lending for the simple reason: People are more likely to default on an investment property mortgage than they are on an owner-occupied mortgage," said Calum Ross, principal broker with The Mortgage Management Group, who mostly works with real estate investors.
Carl Gomez, an independent real estate economist, said lenders don’t want to get stuck with bad loans. “This is completely a reflection of what is happening in the economy. Significant job losses. But it’s also specifically about the kind of jobs people may have or do that could be at risk,” he said.
The additional scrutiny by lenders will make it harder for investors to buy.
“Income, credit and property value. Those are the three things that banks look at and all three are at risk right now,” said mortgage broker Bernadette Laxamana, president of Karista Mortgage in B.C. “It is 10 times tougher now for people who can’t show much income except for their property,” she said.
For example, banks have told brokers they want to see that real estate investors have liquid assets or assets that can easily be turned into cash to cover mortgage payments if renters are unable to make their payments. They are asking to see bank deposits for rent whereas previously the borrower could simply show the rental lease agreement. Banks are also constantly reconfirming a borrower’s income. Before the pandemic, a home buyer’s income would be verified during the mortgage application.
“Some lenders might ask for an updated pay stub one to two weeks before closing to reconfirm the person is still employed,” said Elan Weintraub, a mortgage broker with Mortgageoutlet.ca. “Lenders are reviewing documents more closely and they are reducing the amount of the loan they would offer.”
Any tightening in mortgages for investors could put more downward pressure on the condo market, where investors account for more than one-third of condo owners in the Toronto and Vancouver regions. Although the average selling price remained steady across all types of homes in these two areas, the price of a condo has started to soften, falling 4 per cent in the city of Toronto.
As well, average rents are declining. The drop in resale and rental prices is occurring as an unprecedented number of condos are due to be completed this year in the Greater Toronto Area.
At the same time, investors who bought properties to rent them on Airbnb are losing business with the provincial restrictions on short-term rentals and the temporary demise of the tourism industry.
The housing market could slow further at the end of the year when homeowners have to start making mortgage payments after receiving six-month deferrals from their banks.
As of this week, the biggest banks had provided mortgage deferrals for more than 740,000 homeowners, according to the Canadian Bankers Association. The industry group could not say what share of deferrals were for primary residences versus non-primary residences or rental properties.
Spokespeople for CIBC, TD, Scotiabank and Bank of Montreal would not provide the percentage. Jill Anzarut, a spokeswoman for RBC, said the bank is “seeing typical requests for deferrals for investment properties, and they are in proportion to the makeup of our portfolio.” She did not provide further detail.
“There have been thousands of real estate investors buying negative cash flow properties, specifically condo investments where their monthly costs far exceed their monthly income on those properties and that is a very real source of concern," said Mr. Ross of The Mortgage Management Group.
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