Despite the myriad of rule changes on the residential side, financing for multi-family property has largely remained the same, except that rates have increased due to the 3 rate hikes we have had over the past year.
For the longest time Canada Mortgage and Housing Corp. (CMHC) insured rates for a five-year term were hovering around the 2.25 per cent range, and now sit at around 3 per cent. A CMHC insured 10-year term is currently around 3.28 per cent.
For conventional (non-CMHC insured) financing for multi-family properties, four- to five-year rates are currently in the range of 4 per cent to 4.25 per cent.
One area of multi-family financing where the CMHC-insured criteria has changed is for mixed-use property. Previously, non-residential gross floor space was limited to 20 per cent, and the income from the non-residential space could not account for more than 20 per cent of the property’s income. Those have both been increased to 30 per cent.
Land and construction financing
Institutional lenders still have a strong appetite for construction financing of all types of multi-family projects. The area that is currently difficult to finance, is raw land or land that is in need of a zoning change, whereby actual construction won’t happen for more than a year down the road.
In the current market, this type of financing is essentially only available through “B” or private lenders. Rates and fees tend to be substantially higher (7.5 per cent -8.5 per cent interest and a 2 per cent lender fee is common), but unless you are one of the very few, large established developers, it is realistically the only way that you are going to get any financing on land these days.
Canada’s new mortgage underwriting standards (Guideline B-20) which came into effect on January 1, 2018, have certainly tighten lending standards that affect borrowers on the residential side.
The main change announced by the Office of the Superintendent of Financial Institutions (OSFI) is the establishment of a new minimum qualifying rate, or “stress test,” for borrowers making a down payment of more than 20 per cent of the home’s value. Previously, stress test requirements only applied to insured mortgages (those with down payments of less than 20 per cent) and most variable mortgages and terms less than five years.
Now, even if a residential buyer is capable of putting down 20 per cent or more, they need to prove that they can afford payments based on the greater of the Bank of Canada’s five-year benchmark rate (currently 5.14 per cent) or their contract mortgage rate, plus two percentage points.
The difference is pretty dramatic. Previously a family earning $100,000 putting down a 20 per cent down payment on a 3.09 per cent five-year fixed rate amortized over 25 years, could qualify for a house worth about $500,000, but under the new rules, that family would now only qualify for a house worth $400,000 based on a 5.14 per cent stress test lending rate.
In other words, for those borrowers that are able to put down 20 per cent or more as their down payment, their borrowing power has been reduced by a whopping 20 per cent. The same thing applies on a refinance, under the new guidelines.
To make matters worse, most residential lenders don’t allow a borrower to finance more than five properties with them. At that point they are capped out, and have to look for alternate lenders. So what is an investor supposed to do?
Fortunately, there are solutions on the commercial side for residential investors. I am seeing a lot more of these requests.
Basically, as long as the net income from the properties shows that it can support the loan request, I can usually find a financing solution from my commercial lenders. This of course assumes decent credit and net worth, and depends on the location of the real estate.
Generally, commercial lenders can consider the request if it is for five or more properties, and the net income from the properties can service the loan request with a bit of a buffer (usually 1.2 times). Some lenders may also require that the properties are held in a company name (not under the personal name).
Commercial rates are generally higher than residential, and lender and broker fees apply, but the main benefit here, is that there is no ceiling to the amount of residential properties an investor can finance. When looking at financing a portfolio of properties on the commercial side, it is not based on the individual’s personal income , but about the net income of the properties, and what that net income is able to service in regards to a loan amount.