Self-employed borrowers seek private lenders for mortgages

Ross Marowits
Canadian Real Estate Wealth

The self-employed are among the growing number of Canadians turning to private lenders in order to obtain a mortgage.

While many prospective homeowners are driven to alternate lenders because of government-mandated stress tests and poor credit scores, the self-employed often have additional burdens to overcome in proving their income.

“There’s more and more people seeking private loans than ever before and that’s a direct result of government making it more and more difficult to qualify,” says Dan Caird, a mortgage agent with Dominion Lending Centres.

According to the Bank of Canada, private lenders have doubled their share of the mortgage market since 2015, accounting for eight per cent of Canadian mortgages in 2018, and an even greater share in the hot real estate market of Toronto.

These lenders are less concerned about income and more focused on the property’s value in case they have to foreclose. The tradeoff is higher interest rates and fees.

Still, the option can be helpful for the self-employed who expense as much as they can in order to reduce their taxable income and who have a strategy to beef up their credit score with a goal of returning to a traditional lender.

Caird said it’s usually more financially advantageous to “expense the heck out your business” and show less income.

“Sure you’re going to pay a half a per cent, a per cent, sometimes two to three per cent 1/8more 3/8 on your mortgage but …they usually end up coming out ahead by claiming less income and just paying a bit more on the mortgage,” he said in an interview.

However, the writeoffs make it harder for lenders to obtain the 35 to 44 per cent debt-to-income ratio sought by traditional lenders.

Proving a sufficient track record of income to qualify for a mortgage can be the biggest challenge for people who work for themselves.

“Assuming a self-employed borrower had great credit and ample equity, we used to be able to simply state their income to the bank and show a notice of assessment to prove no taxes owing,” said Robert McLister, found of mortgage news website RateSpy.com

“Those days are long gone.”

The government now wants verifiable proof of true earnings while the stress test makes the hurdle even higher by requiring almost 20 per cent more provable income to qualify for the same mortgage available in 2017, he said.

That has pushed more people to alternate lenders.

“Self-employed mortgages without traditional proof of income are a different animal from your cookie cutter AAA bank mortgage,” McLister added.

The Canada Mortgage and Housing Corp. is trying to ease the paperwork required to obtain mortgage loan insurance, said Carla Staresina, vice-president risk management, strategy and products.

It introduced changes last October that suggest additional factors lenders could consider if the borrower has been operating their business for less than two years, including having sufficient cash reserves, predictable earnings, acquisition of an established business and previous training and education. It is also encouraging acceptance of a broader ranger of documents.

“Our aspiration really is to make sure everyone in Canada has a home they can afford and that meets their needs,” Staresina said from Ottawa.

“We know self-employed Canadians make up about 15 per cent of Canada’s labour force and so we want to make sure that any difficulty that they have in qualifying for a mortgage is mitigated and that we’ve got some options for them.”

McLister said the program will help “at the margins,” particularly those who recently started a business or bought an established operation.

Caird said there’s been some other steps in the right direction. He pointed to a new product from the Bank of Nova Scotia that allows incorporated companies to use retained earnings in the business to help applicants qualify.

Genworth Canada and Canada Guaranty also have programs to help self-employed borrowers, but require the business be open for at least two years.

The mortgage broker’s task is to convince lenders that the borrower is a good credit risk by adding back specific deducted expenses to net income to improve the debt-to-income calculation, said Caird.

While having a sound credit history is very helpful, mortgages can still be obtained for those with less-than-stellar records, for a cost.

Three essentials for borrowers are to have up-to-date taxes, be organized and consult a mortgage broker long before the mortgage is required.

“If your taxes aren’t up to date it’s going to be next to impossible to get a lender to give you a mortgage at any sort of reasonable rate or term.”

Copyright © 2019 Key Media Pty Ltd

Industrial market facing low vacancy rate

Ephraim Vecina
Canadian Real Estate Wealth

Metro Vancouver’s robust industrial market has seen sales activity surpass $150 million during the first quarter of the year alone, according to Avison Young’s Spring 2019 Metro Vancouver Industrial Overview.

Continuing the red-hot trend set by the record-breaking $1.8 billion in investment last year, the market reached a historically low vacancy rate of 1.2% at the end of Q1 2019.

Strong demand and constrained land supply pushed the region’s vacancy level down to the lowest level nationwide for the quarter, Avison Young noted in its study.

The crucial factor is “the ravenous appetite for industrial real estate among tenants, owner-occupiers, developers as well as private and institutional investors to date in 2019,” the report added. “Developers remain unable to keep up with demand as industrial vacancy in Metro Vancouver has now remained at less than 2% for the past three years (and less than 1.5% through 2018) despite the addition of more than 10.2 million square feet in the past 36 months.”

“While construction of lease product is continuing by institutional investors seeking to hold assets long term as well as by those developers who acquired land at historical costs, the volume is unlikely to have much of an impact on vacancy,” Avison Young principal Garth White explained.

“Much of this new lease supply is focused on large logistics/distribution users and is often preleased years in advance of completion. Small- to mid-sized industrial tenants are increasingly left with very limited options. Furthermore, we continue to see a shift in the development pipeline to strata projects, which will have significant consequences in the near future.”

Eight out of 13 industrial markets in Metro Vancouver had vacancy rates of less than 1% at the end of the first quarter. The epicentres of activity were Maple Ridge/Pitt Meadows, New Westminster and Tsawwassen First Nation (TFN), all of which had vacancy rates at 0.1% and lower.

Copyright © 2019 Key Media Pty Ltd

One Central to be a 44-storey addition to Surrey?s skyline

Simon Briault
The Province

One Central

What: 550 one- to three-bedroom homes in a 44-storey tower

Where: 13350 Central Avenue, Surrey

Developer: Aoyuan Property Group

Residence size and prices: 415 — 1,443 square feet; $281,900 — $888,900

Sales centre: 10522 King George Blvd, Surrey

Hours: noon — 5 p.m., Sat — Thurs

Telephone: 604-588-1186

If there’s one thing people in Metro Vancouver know about Surrey, it’s that it’s growing fast. One Central, Aoyuan Property Group’s 550-home residential tower, is set to be a big part of Surrey’s transformation and a landmark on the city’s evolving skyline.

The 44-storey building will be located right in the centre of the downtown core, hence its name.

For Dan Kehler, who lives with his wife and two children in Langley and has bought a one-bedroom home at One Central, that location was a big draw.

“We checked out the City of Surrey’s plan for the neighbourhood and we’re essentially buying into what that area will become,” Kehler said. “At the same time, we obviously like what is now with the proximity to post-secondary education, the hospital and all the amenities.”

The family also owns another apartment nearby and Kehler is familiar with the area and confident he’s made a sound investment.

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“It took very little effort for us to find a very good tenant for our first apartment – a student at Simon Fraser University – so we’re hoping to replicate the process again at One Central,” Kehler added.

One Central will be near the Surrey Central SkyTrain station and SFU’s Surrey campus, as well as a wide range of shopping outlets, cafes, amenities and services.

“We are a one- to-three-minute walk to literally everything,” said Ben Smith, Aoyuan International’s vice-president of sales and marketing for Western Canada. “There are schools, recreation centres, parks, Innovation Boulevard, Central City Shopping Centre, grocery stores and banking, not to mention future retail shops that will line the street front.”

Sales at One Central have been brisk, according to Smith, and buyers so far have come from all demographics.

“We have a good mix of layouts, so we’re serving all housing needs,” he said.

The project’s One Club is a 7,640-square-foot rooftop amenity featuring indoor and outdoor lounge space, a kitchen, a fire pit, barbecue area and ping-pong and pool tables. One Central also includes a fitness room and a business and learning centre.

Homes have one to three bedrooms and include multi-functional spaces and retractable walls and doors that allow residents to reconfigure the layouts.

Kitchens feature quartz countertops and backsplashes, soft-close doors and drawers, under-cabinet lighting and undermount single-bowl sinks. Bathrooms have porcelain tiles for tub surrounds and shower walls, frameless glass doors for shower rooms and floating-style cabinets.

Smith said that the unbeatable location and the flexible floor plans, which allow for smaller overall home sizes, make the homes at One Central truly affordable for almost any kind of buyer. As for Kehler, he’s confident of a quality new home when the project is complete.

“We had a bit of an expectation when we looked them up online that the sales centre and everything else was going to be pretty top notch,” he said. “And when we went there, it definitely reaffirmed what we were thinking before we even walked in the door.”

© 2019 Postmedia Network Inc.

Foreign buyer’s tax and empty home tax affecting luxury housing market

Canadian Real Estate Wealth

Vancouver’s housing market is buckling under a slew of taxes and regulations introduced since 2016 to tame years of relentless growth that made the city the most unaffordable on the continent.

The high end felt the impact first and has been the hardest hit: prices in West Vancouver, Canada’s richest neighbourhood, are down 17% from their 2016 peak. The slowdown is now broadening: home sales in March were the weakest since the financial crisis and benchmark prices fell 8.5% from their record last June.

It’s become more costly to both buy and own expensive homes, particularly for non-resident investors and foreigners. To get a sense of the impact from the municipal, provincial and federal measures, take as a hypothetical example, the province’s most valuable property: the $73.12 million house belonging to Vancouver-based Lululemon Athletica Inc. founder Chip Wilson. A foreign purchaser of the home who leaves the property empty for much of the year would end up paying as much as C$20.8 million in taxes as follows:

Taxes on purchase:

• Foreign buyers’ tax of 20%: $14.6 million surcharge on top of sales price               
• Property transfer tax rate climbs to 5% on most expensive homes: $3.7 million

Ownership taxes:

• Municipal vacancy tax of 1% on assessed value: $731,200 a year
• Provincial speculation and vacancy tax, 2% of assessed value: $1.46 million a year
• Provincial luxury home tax known as the additional school tax of 0.2% to 0.4% of assessed value: $278,480 a year

Additional government moves:

• Federal rules tightening mortgage lending made it harder to obtain larger mortgages and harder for foreign buyers to borrow
• Proposed legislation will expose anonymous Vancouver property owners in a public registry to stymie tax evasion, fraud and money laundering. 

Copyright Bloomberg News

Copyright © 2019 Key Media Pty Ltd

Canadian banks headed toward weakest credit cycle

Ephraim Vecina
REP

Worsening credit conditions are pushing Canada’s banks ever closer towards major loan losses, a new CIBC Capital Markets report stated.

Such losses are “hardly apocalyptic, but still noteworthy.” CIBC emphasized that these threats are looming just beyond the horizon.

“Given the age of the current cycle and soft Q1/F19 reporting in which most banks saw notably weaker loan loss provisions, it does feel like the minute hand on our Credit Doomsday Clock moved a little closer to midnight, not to signal that the end of humanity approaches, but that the end of trough loan losses is coming,” CIBC Capital Markets analysts Robert Sedran, Christopher Bailey, and Marco Giurleo wrote in a client note last week, as quoted by BNN Bloomberg.

The warning came in the wake of a recent Veritas Investment Research analysis, which pressed clients to “lighten up” on stock associated with the country’s largest banks.

Steve Eisman, who had previously predicted the U.S. housing market crisis of the last decade, argued that Canada’s bank CEOs are “ill-prepared” for any potential credit losses resulting from an economic downturn.

According to Eisman, the lenders that are most at-risk are Royal Bank of Canada, Canadian Imperial Bank of Commerce, and Laurentian Bank of Canada, along with insurer Genworth MI Canada Inc. and alternative lender Home Capital Group Inc.

In its report, CIBC cautioned further that Canadian banks are apparently headed towards their weakest credit cycle since the oil-price-crash-induced loan losses in 2016.

“While Canada has not seen a meaningful economic downturn in quite some time, [Canadian banks] remain cyclical businesses that are built to absorb the pain when it comes, not avoid it.”

Copyright © 2019 Key Media Pty Ltd

B-20 forcing purchaser to get unregulated mortgages

REP

One of Canada’s largest banks is calling on the federal government to reconsider controversial new mortgage rules, as the transfer of risk to unregulated lenders potentially makes the market riskier than it appears.

The introduction of a 200 basis-point stress test on new mortgage lending as part of the so-called B-20 regulations accounted for as much as 60%, or $15 billion, of the $25 billion decline in new mortgage originations last year, according to Toronto-based Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce.

While the new rules had the desired effect of improving overall credit quality, it has also led more borrowers into the unregulated sector for financing, resulting in a significant market-share increase for alternative lenders, Tal wrote.

Alternative lenders, mostly private, non-family lenders and mortgage investment corporations, now account for close to 12% of mortgage transactions in Ontario, up from 10% a year ago, Tal wrote, citing data from the province’s land registry. Over the past two years, originations provided by alternative lenders rose by a cumulative 27%, compared with a decline in the overall market of 11%, he said.

“To the extent that more borrowers use alternative channels, due to policy changes in general, and B-20 in particular, the market might be riskier than perceived,” Tal wrote. “Alternative lending is an integral part of any normally functioning market. But a fast-growing alternative lending market is not.”

CIBC is joining realtors and home-builder groups in calls for the government to revisit its B-20 rules. The Canadian Real Estate Association predicted earlier this month home sales nationwide will drop 2% this year, mostly due to higher rates and the B-20 overhaul. Toronto prices fell 0.3% and Vancouver’s slid 0.5% in March from the month before, and “softening prices fuel disruption concerns and limit mortgage-lending growth,” Bloomberg Intelligence analyst Paul Gulberg said on April 12.

Tal suggests that while imposing the stress tests was probably necessary, it’s debatable whether 200 basis points is the right number, given the rule was introduced in an already slowing market, and since then, the Bank of Canada has raised borrowing costs by 75 basis points and 5-year mortgage rates have increased by 35 basis points.

The rules also don’t take into account increases in the borrower’s income, nor do they allow for the fact that during the course of the mortgage term, equity positions rise as principal is paid down, he said.

“Regulators should revisit B-20,” Tal wrote, adding what’s needed is a more flexible benchmark and possibly a narrower spread over the contract rate. 

Copyright Bloomberg News

Copyright © 2019 Key Media Pty Ltd

Lower Mainland home prices are going to fall another 5 percent

Josh Sherman
other

Central 1 Credit Union predicts Lower Mainland home prices are going to fall another 5 percent before bottoming out as the beleaguered market continues to correct.

“While the economy is solid, buyers are constrained by financing capacity while most prospective sellers are less willing to cut prices and are holding out,” writes Bryan Yu, Central 1’s deputy chief economist, in a B.C. Economic Briefing.

“Speculators and owners of high value property in the Lower Mainland are selling at substantially lower prices relative to a year ago, reflecting the change in market conditions and greater willingness to sell,” Yu continues.

Already, the benchmark price of a Greater Vancouver home, which includes condos and houses, has sunken to $1,011,200, down 7.7 percent from a year ago as of March.

While an average price would be based on all home sales, the benchmark excludes transactions at the high and low ends of a market. Experts say this better reflects pricing in a given market because averages are skewed by luxury home sales and excessively low-priced properties.

Central 1 attributes much of the Lower Mainland market’s weakness to policymaker interventions.

Yu cites federal mortgage stress testing that was introduced in January 2018 for uninsured mortgages (read: mortgages for which the buyer has a downpayment of at least 20 percent) as a headwind for the housing market.

The new stress testing, which already existed for insured mortgages, requires uninsured mortgage borrowers to qualify at a rate that is 200 basis points higher than they are being offered. So if an applicant is signing on for a rate of 3.5 percent, they’d need to prove they could keep up with monthly payments at a rate of 5.5 percent.

The stress testing — which the government has been steadfast about maintaining despite calls from the industry to change the rules — was not the only factor holding back the market.

“Recent provincial government measures including the speculation tax in select areas of the province, hikes to the foreign buyer tax and other policies further curtailed demand,” Yu notes.

“In contrast, the economy remains firm with rising employ- ment, a tight labour market and moderate population growth. Excessively low sales are a testament to this disconnect,” he adds.

The 1,727 homes that changed hands across Greater Vancouver last month represented a 31.4 percent decline from sales activity a year earlier.

“A further price decline… of five per cent is anticipated in the Lower Mainland, but conditions will be steady elsewhere in B.C.,” Yu concludes.

© 2019 BuzzBuzzHome Corp.

Mongohouse served as a readily accessible resource for property listings and sold data.

Ephraim Vecina
Mortgage Broker News

The Toronto Real Estate Board announced that it has successfully sued Mongohouse, preventing the now-defunct property listing site from illegally accessing, copying, and sharing the Board’s real estate data.

Filed last fall, the TREB’s permanent injunction went to the heart of the portal’s operations, which previously served as a readily accessible resource for property listings and sold data.

Mogohouse shut down on October 1, 2018, and remains offline as of press time.

“Putting an end to unauthorized uses protects the integrity of the MLS,” TREB president Garry Bhaura told The Canadian Press.

“The operators of Mongohouse.com have acknowledged that they were not authorized to access the TREB MLS system and that their actions were wrong in doing so,” TREB CEO John DiMichele added.

The Board’s long-term policy in such matters is not without its critics, however.

TREB’s resolve to hold onto its sold data as tightly as it can will likely harm the Canadian housing segment’s capacity to innovate, Ryerson University associate professor Murtaza Haider and industry veteran Stephen Moranis wrote in their analysis late last year.

In their shared piece for the Financial Post, the pair argued that TREB’s stance will prevent the rest of the industry from performing any kind of analysis that could actually help the market in the long run.

“For decades the real estate boards in Canada have been data rich and insight poor. The wealth of information TREB holds cannot be subject to data mining for the benefit of board members or the consumers,” the duo wrote in their column.

“TREB and other boards generate data and content that drive millions to their websites — they are content and data rich. The natural next step in TREB’s evolution is to embrace analytics and become not just a data vendor but a purveyor of property market insight.”

Copyright © 2019 Key Media

Heritage Incentive Program to protect buildings

Steve Randall
Canadian Real Estate Wealth

Heritage buildings and assets in Vancouver have been given a conservation boost by the City Council which has approved three components of a preservation package.

The first, is a citywide Heritage Incentive Program (HIP) which will provide grants up to a maximum of $4 million per building for heritage conservation and seismic upgrades of commercial and non-commercial buildings that are on the Vancouver Heritage Register and protected by the heritage designation bylaw.

The HIP replaces the Heritage Building Rehabilitation Program which expired in 2015.

There will also be the option of transferring heritage density for any new heritage designation sites in Gastown, Chinatown, Victory Square, and the Hastings Street Corridor, the areas with the highest concentration of heritage buildings in Vancouver.

Secondly, the Heritage Façade Rehabilitation Program (HFRP), which was first introduced in 2003 for sites in Gastown, Chinatown, and the Hastings Street Corridor, has been expanded to be citywide and will provide grants of up to $50,000 for the rehabilitation and seismic stabilization of the façades of registered heritage buildings.

Finally, the Heritage House Conservation Program (HHCP) is a citywide program that will support heritage conservation of privately owned single or two-family buildings, small apartment buildings, multi-family conversions or similar buildings that are primarily wood-framed, with grants of up to 50% for eligible workv

Copyright © 2019 Key Media Pty Ltd