More Down Payment May Cost You More Money

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The search for conventional mortgage financing just got tougher -- and may get tougher still -- with several Canadian lenders moving to cut their rental programs because of tighter access to bulk insurance.
FirstLine, the CIBC-owned broker channel lender, kicked off the latest round of downsizing, last week announcing it would impose a $750,000 cap on rental property loans up to an 80 per cent loan-to-value. That’s $250K less than what owner-occupieds can qualify for.

Street Capital announced a similar decision last week, axing its rental program altogether. And while it will consider exceptions on a case-by-case basis, that’s only where clients are willing to pay default insurance they technically do not need.

Under Canadian mortgage rules, borrowers opting to go conventional by putting down a minimum 20 per cent are exempt from that requirement.

But increasingly lenders have opted to insure those loans themselves through bulk insurance offered by the CMHC. The practice allows them to then securitize those mortgages for sale on equities markets. It also clears up space on their balance sheets to write more loans.

Last week, CMHC warned that lender access to its $600 billion insurance fund would likely be rationed as the Crown corp. approaches the limit of that funding. Government hasn’t yet agreed to raise that ceiling.

Lenders are now taking a look at their books and deciding where to cut their conventional lending business rather than keep some loans uninsured and, therefore, on their books.

Rental programs – along with business-for-self lending – is most vulnerable to that downsizing, say analysts, suggesting property investors will find it increasingly difficult to win financing for acquisitions.

That has already begun to happen, with another high-profile lender -- Merix Financial -- deciding to pass on mortgage insurance costs to conventional mortgage borrowers asking for LTVs between 65% and 80%.

“It was important to Merix to continue to offer those products – BFS and Rental -- so originators can continue to offer them to their clients,” said Jason Kay, VP of sales. “While some clients are having to pay more, from a cash flow perspective, it is relatively neutral compared to costs before the changes.”:

(from Canadian Real Estate Wealth)