Why Investors Should Refinance their Properties Now with Jake Abramowicz
Jake Abramowicz has been a mortgage agent for 14 years. Hear what he has to say about the new mortgage rules – how investors are the big winners, tips for getting all your deals financed, and why you should refinance your existing properties now before the new rules kick in on November 30, 2016.
JAKE ABRAMOWICZ INTERVIEW HIGHLIGHTS
1:23 What’s your take on the new mortgage rules?
2:58 Who are the biggest winners and biggest losers under these new rules?
4:57 When someone applies for a mortgage, what process has to go through?
7:25 Tips for investors especially condo investors who bought a condo 1,2,3 years ago.
11:17 There are a lot of alternative prime vendors.
12:17 When thinking about mortgage financing, they’re just thinking about five options.
14:37 30 basis point increase equals $80 on 500,000 borrower.
|Speaker 1:||Welcome to the True Condos Podcast with Andrew la Fleur, the place to get the truth on the Toronto condo market and condo investing in Toronto.|
|Andrew:||Okay, it’s my pleasure to welcome to the show Jake Bremowitz. Jake is a mortgage agent with Mortgage Edge. Jake, welcome to the show.|
|Jake:||Thank you very much for having me. I really appreciate it.|
|Andrew:||Good to have you here, Jake. Again, we were just chatting. We were having a conversation on Facebook about some mortgage stuff in one of the real estate groups, one of the industry groups that’s out there. That’s exactly what this podcast is about, just to get some of these conversations that we have in the industry on the inside, so to speak, out into the real world, into the public, so that regular people on the street, especially real estate investors, condo investors in the case of this podcast, can hear what’s going on and get really insider information as to what’s happening. Also just to get, of course, expert opinions and analysis and insight. That’s why we’re excited to have you on the show today.|
|Jake, why don’t we just start, all these mortgage rule changes that have been happening lately, just in general to get things going, it’s been a few weeks now, what’s your take on the new mortgage rules now that you’ve had some time to sit with them? How do you see things in the mortgage financing market today?|
|Jake:||Sure. These rule changes that have happened are not the last of the changes. There will be some more stuff happening in the first quarter, more on the backend on how mortgage lenders list and share their portfolios. From a customer or client facing, buyer/investor facing model or perspective, I will say that the rule changes have had a quite significant impact on first time buyers with less than 20% down primarily and not so much on investors yet, but certainly BMO, for example, has increased its down payment requirement to 30% for investors. Most of the mortgage banks, [inaudible 00:02:07] both announced a differential pricing model for investors. If it’s a rental, you’re paying around 20 to 30 basis points more on a five year fixed mortgage rate. Definitely some pressure on the mortgage market.|
|Keeping all of this in mind, we are still under 3% and I don’t know if you recall a few years ago, our former finance minister was warning not to exceed going under 2% in mortgage rates. He, unfortunately, passed away and the new guy, the new government, never really controlled that market. We are still at very, very low borrowing rates. A lot of your money is still going to principal, almost 50%, but we do have to be recognizing that the market is changing and mortgage banks are making it much more difficult for investors or buyers in order to get them in.|
|Andrew:||Who’d you say so far … Who are the biggest winners and biggest losers under these new rules?|
|Jake:||Biggest winners are investors. I mean, absolutely. Had I known six months ago what I know today, I would have been buying condos. I still would consider buying condos. Small, big units. Here’s why. If I’m a buyer looking at a 760k house and I can only afford a 610k house because that’s how much less than the property I can afford, I’m not in the housing market anymore unless I stretch my boundaries substantially. What do I do? What if I don’t want to buy a condo? I want to rent one. I still want to have that lifestyle. The biggest winners for sure are the investors, and be it condo investors or multiplexes or even single family dwellings with basement apartments, whether you live there and rent out the basement, whether you rent out both units, or the whole house or however. The investors are definitely going to win here.|
|Where they’re going to lose is how difficult it will be to pull any equity out to keep investing. A lot of our buyers, yours and mine, Andrew, I’m sure, have been using their equity, refinancing, pulling money out, buying the next place, buying the next place, as the price gains up and realizes. With that market tightening, with the finance market tightening on November 30th, that will be increasingly more difficult. Not to mention, lenders are not only stressed having applicants on the wait side, they’re stressed having them in a general lifestyle stress test. They’re looking at affordability. They don’t have kids or they’re having kids. Is the wife on mat leave? Is the husband on paternity leave? Will there be a change in their income? What is the rental income like? Are they reporting it? I have never seen the level of detail that my underwriters are asking for in my entire 14 year history, and I’ve seen 2008 happen. I’m no veteran, but certainly long enough to see some changes. I’ve never seen this kind of digging deep for investors, specifically.|
|Andrew:||Wow, that’s really interesting. That’s, again, a valuable insight for people to understand that on the underwriting side … Maybe just explain it for the uninitiated. When you say the underwriting side, maybe just give a quick overview. When someone applies for a mortgage, what’s the process it has to go through to get approved and what are the changes that have happened in that process?|
|Jake:||Absolutely. It’s a great question. To be very general, you apply for a loan. Either you’re an investor or an end user. You apply for a loan. You put in an application. Credit is checked. Employment is usually verified by way of a letter and a pay stub. If you’re an investor you may have had to provide a lease or two. Now what we’re seeing is the underwriters are asking for a letter, a pay stub, two of your tax returns. They’re asking to see if you, as an investor, are showing your rental income on your [inaudible 00:05:38] in general. If you are, are you making a loss or a profit?|
|Keep in mind, each individual bank and lender have their own ways of mitigating lender properties. We used to only be allowed to use 50% of rental income many years ago. Then it went up to 100%. Now it’s back to 50. Since that rule changed a couple of years ago, the lenders said, “Hold on. 50% of rental income means nobody would qualify.” That’s not a real world number. What they’re using now are different formulas and ratios when qualifying investors who own multiple properties.|
|To answer your question more specifically, what are underwriters looking for, they’re no longer looking at just a letter. They want more history. If you haven’t been there more than a year, they want more history there. Where did you work before? Show me your taxes. Why do you have so much debt? Where is your debt going? Show me you rental income going into your account to back up the lease agreement, to back up the [inaudible 00:06:31]. It’s simply a matter of they’re asking for two, three, or four more pieces of documentation. I tell all of our clients, please keep this stuff handy and organized. Keep it on Dropbox and Google Drive, wherever you keep it. You’re going to need it when you keep applying and they’re going to ask you. The reason that they will ask you is they are the ones lending that hundreds of thousands of dollars and if they’re under pressure from the government to be more strict, we have to abide by that.|
|I fight my lenders all the time with push back with how much a client needs to provide, but I’m lately noticing I’m losing those battles and I’m picking my battles as to what is truly normal to ask them, what is over and above the requirements, right? In general, it’s just getting tighter in terms of the number of questions and how deep they are. We just got to keep our clients organized, their paperwork, their packets up to date, leases up to date, and you’ll be fine.|
|Andrew:||That’s great. Any other tips for investors who are maybe … Especially condo investors who maybe bought a condo one year, two year, three years ago, it’s coming up for closing soon and maybe they were thinking under the old rules it might be easy. Is there any tips for the investor who’s going out and applying for a mortgage in today’s environment or, say, in the next few months? Although, of course, things could change again. Things are changing quickly.|
|Jake:||If nothing changes moving forward, I would say that have 20% ready, whether you’ve already put that deposit or not. You will almost for sure want to go to a big bank. They are the ones that do not add a rental premium to their mortgages for investors. If I have 20% down and I go to TD Bank, I don’t pay a mortgage insurance premium. If I go to Merit Financial, I will pay a premium because Merit has to back and insure that loan with CMHC.|
|Now, as of November 30th, that whole product may even not be available. Be prepared to only deal with your big bank. Be prepared for a much longer timeline in getting all this done. Maybe even be considering [inaudible 00:08:33] some of your existing home equity to increase the down payment, if required. Other than that, also get your rates held. If you think you’re registering within the next three to six months, there are most lenders that will do four month rate holds, if not six month and even one year rate holds. Consider getting the rates held if you think within the next six months you’ll be registered. Now is the time to do that before rates go up as they have previously, as they will again in January due to more pressure, as they may again as Donald Trump has said he doesn’t want to do [inaudible 00:09:05]. If they move, we may move. Keep those things in mind. As I said earlier, be organized, get our rates held ASAP, and be prepared for any extra documentation, any extra down payment that you may be facing.|
|Andrew:||This is great, Jake. Lots of great insights and tips and dropping some great wisdom bombs here on us for investors.|
|Jake:||Yeah. We spoke about refinancing and I think that’s what triggered this whole conversation. Not to scare people, but I do want to say that the government has made a pretty strict change in its refinance policy. Ultimately what they are saying is the government or CMHC is not in the business of allowing Canadians to tap into the equity. CMHC was created in the ’40s to help World War veterans come back and afford a home. Obviously, that whole policy has changed and that’s not what it’s there for now. It’s to help Canadians have home affordability.|
|What CMHC has seen is a massive spike in refinancing due to increased prices, so what they are saying is, “Hey, as of December 1st, we’re not in that market anymore. You got to go to your bank to refinance.” If you have investors that are closing soon that are sitting on a ton of equity, tell them to consider refinancing before November 30th because they’ll have more choice and they’ll have a better rate. After November 30th, if you can only go to five places to do it versus fifteen, obviously the less choice there is, the higher the rates will be and maybe the more difficult it will be to refinance annually. The refinance game isn’t done by December 1st, it’s just the choices are very limited after that, so that’s what they should also consider doing. Talk to a broker, talk to their bank, and pull out equity as much as they can before that rule changes.|
|Andrew:||Well, that’s fantastic. I was just going to ask you that and you beat me to it. Thank you very much. You’re making my job easy. Yeah, this has been great, Jake. Appreciate you doing this on a short notice as well. Is there anything else you’d like to add or any other question I didn’t ask you that I should have?|
|Jake:||Well, I would like to add that there is a lot of borrowers out there that may have bought new construction a few years ago whose jobs may have changed, they may have gone self-employed, there are a lot of alternative prime vendors. I don’t call them sub-prime because their rates and their models are not sub-prime models like in the US in 2008. There are a lot of alternative lenders like the credit union, like the [inaudible 00:11:30] Equitable Bank who will still do or finance self-employed individuals at 20 to 25% down.|
|If you’re facing a crunch, if your bank is saying, “Look, we’re sorry, you do not income qualify,” you as an investing specialist, you will tell your buyer, “Look, if the cash flow works, the cash flow works. Don’t be scared of these alternative prime vendors. Let’s consider working with them. Rates will be higher, but so will the interest. If the interest is higher, that’s how much more you can deduct off of your rental income.” As long as the cash flow works, there will always be an option for you, the borrower, regardless of what position you’re in. Just be open minded to this because our market is changing so fast. It may be somewhere where you end up.|
|Andrew:||That’s a great tip. Yeah, why is it that so many people still when they think about mortgage financing, they are just thinking about five options when, like you said, there are a lot of other options for people in Canada?|
|Jake:||I think we have, as Canadians, we have been used to the idea of two things. One, the big banks hold so much marketing power. Let’s face it, every mall plaza whether it’s A, B, or C plaza, your ad will have a big bank present there. Their marketing power is just enormous. Secondly, we as Canadians have been really used to lower, lower, lower rates and the trend has been your friend. It’s been going downwards. Five years ago, 3.79. 3.49. Today, 2.39. It was as low as 2.14 a couple months ago. We are used to that idea. When we hear we may have to pay a percent more, we think that’s way too high. In reality, a percent more today on an alternative prime vendor, it’s the same rate we would’ve paid five years ago. We’re just really used to the idea of big banks and we’re comfortable with them. 30% or 35% of the first time buyer market uses a broker and usually the brokers have access to these various different lenders.|
|Now, some banks have relationships with these home [inaudible 00:13:27], but they’re simply the paper pushers. They’re saying, “Hey, we can’t do it. Let’s see if these guys can.” Whereas a broker will be able to look at the whole deal and place it immediately and tell the borrower, “Here’s where we’re working with this.” I’ll give you one real example. One of my best clients, he owns four condos [inaudible 00:13:43]. He just bought a fifth. It’s closing on [inaudible 00:13:47] area. He’s closing. He owns a business. He shows 500,000 gross income and very little net income. He’s gotten used to the idea of going to Home Trust and they’ve all financed all of his deals. They’re charging him a higher rate but his condos are rental income and he pays it and it covers all of his expenses. In reality, he’s gotten used to it and I just hope that more borrowers are understanding there is choice out there, just you have to be open to using them.|
|Andrew:||That’s great. Certainly no time to panic as investors if you go to your local big bank or the bank that you do your checking account with and they turn you down. It’s more of a sign of the times, but it’s not a time to panic, like you said. If you speak to a good broker like yourself or others, there are solutions out there.|
|Jake:||Yeah, well listen, a 30 basis point increase equals $80 on 500,000 borrower. This is absolutely not a rate rising epidemically. It’s no time to panic at all. 80 bucks is not going to kill your 500k budget or it’s not going to kill your purchasing power. It won’t kill your rental. As rental income keeps increasing, which they will because of the market tightening on the buy side, again, investors have it really, really well right now, especially those who have bought two, three, four years ago new construction are now closed.|
|I did want to touch on assignments, if I may, because that’s a very hot topic lately amongst my buyers. Assignments are, as we know, you bought a place for 400 in 2012 and now it’s worth “500” so you still have the right to sell off that paper to another investor prior to closing. I did want to say that there are very few options where a financing company will finance the entire new purchase value. For the most part, if you are selling off an assignment, that buyer of assignment has really one of two options. They can go to a monoline vendor, RMG Mortgages, which may even touch this program soon, or TD Bank, who does it on inspection. Keep in mind if you’re selling or buying assignments, it is a much more difficult process, but it could bring you some good value. It’s not the end of the world. There is only one option, two options, but it’s still something that can be financed at current market price. Until that changes, you’ll be the first to know and you’ll pass that onto your listeners and their clients. It is still possible to do. If you have the cash to pay for the difference out of your own pocket, every vendor will finance the assignment at its original purchase price. Just only a couple will finance it at the new purchase price.|
|Andrew:||Great tip. Great tip. Jake, thank you so much for your time today. If people want to find you or get a hold of you, what’s the best way for them to do that?|
|Jake:||Best way is on Twitter @mortgagejake. They can always call me at 416-910-4448 and of course send me an email email@example.com. I’m quite active on Facebook and on Twitter. I’m always there and people can reach out, ask any questions they ever have. I love chatting about the business. I really do appreciate the opportunity to speak to you and your listeners. Thank you very much.|
|Andrew:||Awesome. Thanks, Jake. Hopefully I’ll have you again on the show soon.|
|Jake:||Any time. Thank you.|
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