29 Apr

What Changes to Large Portfolio Financing Means for You


Posted by: Bai Jiang

This is an article that I had written for REIN (Real Estate Invesment Network) on April 24.

This past Monday (April 20th), TD announced some changes to their rental policy through the broker channel. Basically,

  1. There is now a maximum of five rental properties per borrower including those financed by other financial institutions.
  2. Rental income requirements for single rental property applications including owner occupied multi-unit properties will be qualified by calculating:
  3. 50% of the gross rental income included in the borrower’s personal gross annual income and adding 100% of the mortgage payment to the borrower’s personal liabilities along with property taxes and heat costs.

Through my sources, this change is being rolled out at TD’s retail channels very shortly as well.

You might ask why should you care and does this apply to me?

These are significant changes since TD previously did not care about how many properties someone had in their entire portfolio. This was a huge advantage for investors as it allowed them to get cheap financing and to build more of a portfolio before seeking JV partners.

Before this change, most lenders were already capping the number of properties the borrower has in their portfolio. So TD is now staying on par with   the other lenders. I could see where TD management is coming from in limiting their risk exposure given the state of the economy due to the lower oil prices.

TD is a favorite lender of mine to help clients build larger portfolios as well as securing financing for smaller centres (such as Northeastern BC) since most monoline lenders (eg. Home Trust) will not lend there. In the past, I had gotten financing for a full-time real estate investor who had 30 properties in his personal name. Not an easy deal since he had no other income beyond the rental income, but TD was able to approve for 75% LTV at 3%. This was a fantastic deal, but that’s not available through TD now for investors with larger portfolios. I believe TD has lost a differentiating factor from its competitors.

The second change has to do with how rental income calculations are done. This will affect individuals that are buying their first rental property. For investors with two or more rental properties there is no change; they will continue to qualify using the rental worksheet (which washes out the expenses using the rental income).

To illustrate the impact of this change, let’s consider the following example. Let’s say you would like to buy a rental property (house). You have good credit (680+), make $3,000/month, and have liabilities of $600/month (e.g. credit card, line of credit, car loans). Let’s assume that the rent will be $1,500/month and property costs (e.g. mortgage, property taxes, and heating) are $1,200/month.

Let’s also assume that TD has the best rates and terms available. Since you have good credit, TD (like most lenders) would allow the Gross Debt Service (GDS) limit to be 39% and Total Debt Service (TDS) limit to be 44%. Under TD’s new guidelines, only 50% of the rental income ($750/month) can be added to your income (e.g. from your job/work) while you have to debt service 100% of the housing costs. So your GDS would be 27% and TDS would be 48%. You would not qualify for this financing.

Previously, TD would have allowed use of their rental worksheet. In the above example, your GDS and TDS would have been within limits and you would have been approved for this financing.

In this situation, you can also look for other lenders such as Scotiabank and National Bank as options, but they currently have slightly higher rates. The deal will still work, you’ll still make money on it, and you’ll get closer to your BELIZE. That’s why I would advise you that although rate is important, getting good financing is better than no financing. In addition, National Bank could have been better choice even at higher rates because they only require 20% down payment. Through a higher mortgage loan, you can increase your ROI.

So what are your options now?

There are still lenders such as National Bank that will accommodate 16 doors; however, their rental calculation is done primarily done using add-back, which will make it harder to qualify. Although, if the rental income is reported on your tax return, it can be netted out, which reduces your debt servicing.

Beyond the 16 doors, there are options like RBC, however it will have internal limits on how much money it feels comfortable lending to you.

There are a few other options:

1) B lenders, which will have lower Loan to Value (65% LTV) and higher rates (and possible fees)

2) Commercial financing for residential properties, which will have lower LTV of 65% and higher rates (and possible fees);

3) Seek JV partners to qualifying for financing, but you will be giving up some equity

4) Move toward commercial real estate investing (e.g. multi-family), which uses the property to qualify, but the property acquisition costs will be higher.

Keep in mind policies will get tightened and relaxed over time based on lending risk. If you’re looking to build a larger portfolio, it’s important to work with different lenders and have a financing strategy to get you from where you are today to where you want to be. I would encourage that you talk with your mortgage broker/lender to understand what options are available to you.

P.S. If you want to see how I can help you grow your real estate portfolio and revenue, go here.

20 Mar

Brokers may ultimately have to thank RBC for shooting holes in BMO’ss 2.99%


Posted by: Bai Jiang

Brokers may ultimately have to thank RBC for shooting holes in BMO’s 2.99% – the biggest of Canada’s big banks running ads critical of the no-frills mortgage.

“What good is a low rate mortgage without the frills?” asks an RBC full-pager running in a national daily. “Switch to RBC Royal Bank and get a 2.99% fixed-rate mortgage with all the frills.” Aside from that last bit – the plug for RBC’s four-year fixed – the message amplifies the one mortgage brokers have struggled to get out to consumers. They’ve used it to retain clients looking for BMO’s same rock-bottom rate, but unaware of the even lower prepayment privileges and the restrictive 25-year amortization.

Click here to read more from MortgageBrokerNews.ca.

14 Dec

A Better Way To Tap Home Equity


Posted by: Bai Jiang

If you can’t live within your means in your working years, there’s no reason to believe you’ll pull it off in retirement.


So let’s start familiarizing ourselves with the options for retirees who didn’t save enough to live the kind of lifestyle they want. One is to go back to work. Easy to say, but hard to do unless you can consult or have an affinity for fast food.


Another is to rent out a basement apartment or sell the family home and either buy a cheaper house or rent. Moving is a non-starter for many retirees because they still enjoy their homes and want to have a place for kids and grandchildren to stay.


This brings us to two options for borrowing against the equity in your home, one of which, reverse mortgages, was covered last week (read that column here). The other option is the home equity line of credit, which a lot of people will set up and use long before they retire because it’s an efficient way to borrow.


Click here to read more in the Globe and Mail.

14 Dec

Canadians Slowing Down On Borrowing Amid Economic Uncertainty


Posted by: Bai Jiang

There are signs that Canadian consumers have slowed down their borrowing this year, after peaking in the fourth quarter of 2010.


A TransUnion analysis released Thursday found that average consumer debt, excluding mortgages, was $25,594 in the third quarter.


That’s about where it has been throughout 2011, although up slightly from where it was in the third quarter of 2010.


Click here to read the full article in The Star.

14 Dec

Global Economic Uncertainty Will Keep Canada’s Growth Moderate in 2012: RBC Economics


Posted by: Bai Jiang

After a turbulent year, Canada’s economy is set to grow by 2.5% in 2012, according to the latest economic outlook issued yesterday by RBC Economics. 


Commodity prices remain at historically high levels, the US is projected to continue to grow and the Bank of Canada is keeping monetary policy accommodative – all of which will support growth in Canada. But the forecast includes the key assumption that European policymakers contain the sovereign debt crisis in that region.


“Canada’s economy experienced some large swings in growth in 2011. The second quarter’s unexpected contraction was a response to a number of temporary factors – the natural disasters in Japan, reduced auto industry activity and wildfires in Alberta. As these factors reversed, a strong rebound followed in the third quarter,” said Craig Wright, Senior VP and Chief Economist, RBC. “While the initial release of second quarter data prompted some talk of a double-dip recession, third quarter data proved otherwise.”


The Bank of Canada has held interest rates at low levels in the face of heightened uncertainty about the global economy, moderate growth in Canada and expectations that inflation will remain steady. Recently, the Bank of Canada reaffirmed its 2% inflation target for the next five years and signalled its continued commitment to flexible policy making.


Click here for more details from RBC.

14 Dec

5 Reasons Why A Fixed-rate Mortgage Could Be Your Best Bet


Posted by: Bai Jiang

It’s a decision that millions of Canadian homeowners struggle with repeatedly during their time as homeowners: Do they choose the security of a fixed-rate mortgage, or opt for the flexibility (and usually lower cost) of a variable rate and hope that rates don’t spike higher?


But right now, conditions in the mortgage market mean homeowners can actually get the best of both worlds, according to market-watchers.


For years, we’ve seen evidence that people who opted for variable-rate mortgages ended up saving money over the fixed-rate crowd – anywhere from 77-90% of the time, depending on the period selected and the assumptions used.


Despite that, 60% of the 5.8 million mortgages out there are fixed-rate mortgages, and the five-year term is especially popular. Another 31% of mortgages are variable- or adjustable-rate. The rest are hybrids that have a bit of both types of mortgages built in.


In the past year, we’ve seen evidence that people have been starting to swing more towards variables. But in the past few months, two things have happened in the Canadian mortgage market that may have the “variable-is-best” crowd changing their minds… or at least re-thinking what used to be an easy decision.


Click here for five reasons why a fixed-rate mortgage could be your best bet from CBC News.

14 Dec

EnRICHed Academy’s "Smart Start For Financial Genius"


Posted by: Bai Jiang

Dominion Lending Centres is proud to announce the launch of EnRICHed Academy’s “Smart Start for Financial Genius”! This program has been designed to educate young adults (13-23) and their families on the fundamentals that build wealth in an entertaining, funny and entirely interactive way.

No program like this currently exists, and the need and demand across North America is at an all-time high. This is our way of giving back to communities across Canada, ensuring our youth embrace financial literacy.

Click here to view the EnRICHed Academy trailer!

Why We Created The Product:

– Statistically, 6 out of 10 Canadians live paycheque to paycheque, which means if their income stopped for only one pay period they’d have to rely on a LOC or Credit Card to make ends meet

– From 1989 to 2006, total credit card charges rose from $69 Billion to $1.8 Trillion; a 2,600% increase

– Today the average household credit card debt is $16,007

– The yearly savings rate of an average Canadian has gone from over 12% of income in the early 90s to under 2% today

– Household debt in Canada has more than doubled over the past 10 years

– 84% percent of college graduates in North America indicated they needed more education on financial management topics. Parents expect the schools to teach financial literacy and schools expect parents to. The fact is, most parents and teachers are ill equipped to teach students and kids on this subject and, therefore, don’t

– The average college graduate is $23,186 in debt

What The Product Looks Like:

The program comes in a box and contains 5 DVDs of entertaining but highly educational video on creating a foundation for building wealth. There is a 100-page workbook that the family will work through that includes activities and exercises as well as other materials that correspond with the topics covered in the program.

What Topics Are Covered:

  • 1. Understanding money 101
  • 2. Why some people don’t save money… No matter how much they make
  • 3. How much we actually spend at an early age
  • 4. Saving Money vs Making Money
  • 5. The power of saving 10%
  • 6. Why starting to save at an early age is CRITICAL
  • 7. The magic behind COMPOUND INTEREST and how it works
  • 8. How to systemize your savings and where to put your money at an early age
  • 9. How to buy your first investment property by the age of 23
  • 10. How to get into the stock market
  • 11. What a credit or beacon score is
  • 12. How credit cards work
  • 13. What to look for when buying your first car
  • 14. Good debt vs Bad debt
  • 15. How taxes work on a paycheque
  • 16. Understanding why having a job you love is critical to building wealth
  • 17. How to find a mentor
  • 18. 6 steps to move ahead in your career
  • 19. The influence of your environment
  • 20. There are no shortcuts
  • 21. Why goals are critical to building wealth
  • 22. The difference between a dream and a goal
  • 23. How to write down goals and take action
  • 24. The importance of building your personal brand
  • 25. If people can’t trust or depend on you… they won’t pay you
  • 26. Why your reputation is so important
  • 27. How to use your reputation to your advantage