New equity mortgages base loan on property’s value rather than borrower’s credit
Fiona Anderson
Sun
Daren and Elaine Sanders of Steveston are taking their time while investigating buying an investment property in Vancouver for the potential capital gains. Photograph by : Ward Perrin, Vancouver Sun
With real estate prices continuing to climb, and new mortgage options making buying property possible again, the time for investing in a rental home may never be better.
“It certainly is much easier now [to invest in real estate] than it’s been, I think, ever,” said Steve Moffitt, a senior mortgage consultant with Equimac Mortgage Centre.
Moffitt says lenders are getting more “aggressive for the business” and are coming up with new products to attract borrowers.
One new product is the equity mortgage where a lender bases the loan on the value of the property, not the credit of the borrower, Moffitt said. From a borrower’s perspective, with the emphasis on equity rather than income, increasing property values means people who bought a few years ago are now sitting on a significant amount of money that can be taken out and invested in a rental property, Moffitt said.
A purchaser who paid between $150,000 and $250,000 three years ago now probably has a property worth $300,000 or $350,000, Moffitt said. So there’s at least an extra $100,000 in equity “that can translate easily into two other rentals,” he said.
“You’ve typically only got a certain amount of equity to work with, so the less you put down the more properties you can purchase and the more market value you can gain,” Moffitt said. “The best strategy if your service ratios will allow for it is high-ratio [mortgages] using other people’s money … and buying more in an active market.”
With current low rates, increasing the mortgage on a residential property to use for a down payment on a rental won’t translate into significantly larger payments, especially if the amortization period is lengthened, he said.
In March, the Canada Mortgage and Housing Corp. began insuring 30-year mortgages on residential properties and Canada’s other mortgage insurer, Genworth Financial Canada, agreed to insure 30- and 35-year mortgages. The longer periods would come with an increased fee that would likely add only a few dollars to the monthly payments, said CMHC’s director of product development and strategic direction, Steve Mennill.
CMHC will go even further for rental properties, insuring mortgages for up to 40 years with only 15 per cent down, Mennill said.
While CMHC charges an additional premium for every five years added to the term of the mortgage, borrowers find they recoup that money through lower interest rates, Mennill said. And the interest is tax deductible.
“When it’s an investment property … it’s in your interest to keep your mortgage loan higher for longer because you can write off your interest payments against the income, which you can’t do as a homeowner,” Mennill said.
CMHC insures mortgages for rental properties to make rental housing accessible, Mennill said.
Daren Sanders and his wife Elaine are thinking of taking the plunge and investing in a rental property as a way to further diversify their investment portfolio.
“At this point, from the perspective of investing, it’s a question of what do you do after you’ve topped up your RSPs,” Sanders said.
He was unaware of all the financing options.
“Certainly that would be something to factor in,” he said.
The Steveston couple are motivated by the potential for capital gains from a rising market, as well as the rental income, Sanders said.
“The obvious [investment] is residential downtown, because it’s a hot market. But the other side of that is it’s a hot market, so it’s expensive,” Sanders said.
What if there is a correction? Sanders asked.
So he and Elaine are taking their time looking around before jumping in.
Certified financial planner Biljana Manojlovic said the Sanders’ cautious approach is the right one.
There has been such a phenomenal real estate boom in the last few years with double-digit gains that real estate investing looks very attractive right now, Manojlovic said. So a lot of investors are looking for a quick fix rather than a long-term strategy. But people have to keep in mind there is no guarantee that these double-digit returns will continue.
“Real estate as an investment is very attractive because it appreciates in value,” Manojlovic said. “[But] the key to real estate investing is taking risks one can afford and not overstepping your financial means.”
“You need to be prepared if [the market] turns around,” she said. “Will you be able to service that debt?”
Owning a rental property makes sense as part of diversified portfolio if you already own stocks and bonds, she said.
“Does [real estate] have a place? Absolutely — for the right type of investor who understands the risks,” she said.
Diversification is key, said Adrian Mastracci, investment counsel with KCM Wealth Management.
“If you just have a property here in Vancouver you’ve got one property, one locale and you’re at the mercy of whatever happens in the local market,” Mastracci said.
A more diversified approach to getting into the real estate market may be to buy shares of a company that owns real estate or investing in a real estate income trust, he said.
Baskets of REITs are also available for even more diversification, he said.
“People that have done well in real estate will tell you they have had a diversified portfolio,” Mastracci said. “Sometimes they can make it on one or two properties, and it’s wonderful when they do.
“But if you’re in that local marketplace and that market turns against you, it’s a tough one.”
© The Vancouver Sun 2006
