Why Condos Are Going to Kill It Under the New Mortgage Rules with Mortgage Jake
In this episode we get the always informative and engaging Mortgage Jake (Jake Abramowicz) to talk about the new mortgage rule changes (i.e. the stress test). Find out why Jake says condos are going to “kill it”, why you should refinance your existing properties NOW, and why you might actually better off putting less money down than more on your next home.
JAKE ABRAMOWICZ INTERVIEW HIGHLIGHTS
0:48 What are these new mortgage rules?
4:27 Great analogy, “the property ladder.”
6:55 Do you think prices will come down because of this mortgage change?
10:05 What do you mean by, putting down less money?
12:49 Is there any creative way, to take advantage of what you just described?
14:18 Why real estate investors should be in a hurry to refinance their properties?
19:26 Anything else you want to add about the mortgage rules?
Andrew la Fleur: On today’s episode, Mortgage Jake tells us why condos are going to kill it. Thanks to the new mortgage rules. Find out what he means on today’s episode.
Intro: 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 la Fleur: Okay. It’s my pleasure to welcome back to the show a returning guest. He’s been here many times I believe now, Jake Abramowicz. Jake is also known as Mortgage Jake. He’s a mortgage agent with Mortgage Edge. He’s been in the business for … Jake, how long have you been in the business for?
Jake Abramowicz: It’s my 15th year this year, actually.
Andrew la Fleur: 15 years of experience, so definitely knows what he’s talking about. Great to have you back on the show, Jake. We want to talk about these new mortgage rules. What are these new mortgage rules?
Jake Abramowicz: I hate the fact … First of all, thank you. I appreciate the opportunity to speak to all of your clients and investors.
I hate the fact that the label is so stressful. The stress tax, you know? Same thing with last year’s. Just got everybody up. All of the headlines came out screaming, “Stress this! Stress that!” It does cause a lot of panic and stress in the market, but the reality is, the new rules are very simple to understand.
First of all, from a qualifying perspective, all that it means is we need to prove to the banks and lenders, if you have 20% down or more, regardless of down payment, you can afford a mortgage that’s 2% higher than the mortgage you’re getting. The easiest way to quantify that from an income perspective, because mortgages are based mostly on income, is prior to the changes on December 31, you can borrow up to seven times your income. After the changes come, it will be closer to five times your income, and from that we can extrapolate some further numbers based on how many properties you own, how they carry and what have you. But the bottom line is, it’s a five times income metric moving forward with all of the mortgages, with 20% down or more.
Remember last year we had the original stress test? 5% to 19.99% buyers? They’re already stress tested all year, so they’re already at five times income. It’s now the new crop of buyers, the 20% or more buyers, that would be at five times income as well.
Andrew la Fleur: That’s right. From the makers of Stress Test One comes Stress Test Two: The Revenge.
Jake Abramowicz: Right.
Andrew la Fleur: It’s like a movie trailer.
Jake Abramowicz: A lot of harm, right? I mean, the market did great, as we talked about on an earlier podcast up until April. The condo market’s been doing fantastic and once again Andrew, I turn to the fact that you’re a prime player in the space. Condos are going to kill I believe, because of this test. If you can only borrow five times income, that means you can borrow less money. If you can borrow less money, you can walk down the property latter. You look at a two bedroom condo verses a two bedroom home for example. I truly believe condos will be … Two bedroom condo will be like printing gold bars in your house. Long term of course, right? Now a lot of your readers and your listeners may say to themselves and to me, “I don’t want to go to seven times income.” And that’s a very valid point. I see that all the time. Why would anyone want even get to that point?
You know there are a lot of couples or singly buyers or situations and deals that I see where we have a true income that’s closer to four times, but we can’t use some it. For example, some basement apartments we can’t use the income from. Some people have a part-time job that’s simply not … We can’t qualify with the lender. Some people have parents that are kicking some money in. There are many, many ways that people are making money in the city, they’re very creative. Some Uber drivers for example, some side hustles.
So I’m not saying to anybody, “Hey you should borrow the maximum you can and go crazy into debt.” I’m just saying these are the rules that we have, here’s how to get around them, and here’s what’s going to happen. I again, firmly believe condo investment is one of the best opportunities in this market because of so many buyers being pushed in that way.
Andrew la Fleur: Yeah, absolutely, and just to be clear everyone listening. I did not prep Jake, I did not tell him to say that. For all the condo investors out there. But no, it is a reality. It’s something I’ve been telling people as well. That it, as you said, great analogy; the property ladder, right? The property ladder. You move up the ladder.
What government is basically doing is taking a big hammer and boom. Everybody gets knocked down a couple of notches, but you’re still on the latter. People still want to buy something. People still have to live somewhere. Basically, the government has just … They can’t touch interest rates, they can’t actually touch property prices. This is not Communism. So what can they do? They basically limit to how much you can buy and how much can borrow, I should say. And that is going to push everyone down the ladder. So it puts more pressure on the bottom of the latter and it takes pressure of the top of the latter. Doesn’t it?
Jake Abramowicz: Absolutely. The luxury house market, two million, three million plus … When I do those kinds of deals for buyers those people are so well qualified to begin with. So the two to three million plus property range, condo and house, will not be affected by this. But that four hundred thousand dollar starter condo will now be such an attractive entry point. For your investor. For your first time buyer. For your parents who want to have a Cartier downtown, who lives up in Richmond Hill for example. So we can think of three different people that will be competing for that right away.
With rent, like you said, “Where are people live?”. Well, what’s the option? You either buy or you rent. And we all know, based on the stats coming out, with rent being so high in the city already. The idea to buy is such an attractive entry point. But, we are now going to be seeing so much more competition in the condo space. Especially, the three to 750 range, because families are going to seek some form of shelter that … At these mortgage rates half of your payment is going to principle. So you’re really aggressively paying down your mortgage.
I’m seeing this an opportunity for people because they are saying … I’m saying to them, “Look, you’re going to buy something, you’re going to pay your mortgage down in 20 to 25 years. You’ll get out debt ASAP. You’ll get build equity, you’ll get to invest that equity elsewhere. But at least get in there and start paying down before prices in this segment kind of run out away from you.”
Andrew la Fleur: Do you think that these changes could lead to declining prices in any segment of the market? Obviously I’m thinking of detached, low-rise housing. Do you think, do you see, do you predict a scenario where prices come down because of this mortgage change?
Jake Abramowicz: Well I believe … And I’m putting on my realtor cap for the record, I’m not a real estate agent, I don’t have a licensee. But I track the market, I look at it. I believe firmly that anything in the city, anything that’s got a reasonable access to the subway, to transportation, schools, etcetera; all the amenities that we want, will do decent. I’m not predicting a growth and I’m not predicting a fall. Let’s call it maybe a potential flat growth. You’re up and coming neighborhoods, such as Minnacle, for example. I believe will do well because as people get priced out of the very pricey downtown condo market they still accessibility to the city. So they’ll buy something that’s in the kind of secondary zone. So those I think will do well.
I’m not so confident on the further reaches of 905, for example, in the less well-established neighborhoods. In the detached homes that have such an incredible run, where there’s certainly a little bit of break. I don’t expect, if your affordability or qualifying rule goes down by 20%, a common argument that I’ve been seeing online is, “well guess what, prices have to fall in line right?” No, not necessarily, because prices will also be dictated by supply. And if there are less people that can qualify to move up, that means there will be less people selling. That means the supply will still be limited for people to buy in.
So I feel if you have a single family, detached home between $750 or even closer to one million, maybe that’s the property that will have the biggest impact because people just can’t reach up that high potentially. I’m not expecting a correlation between qualifying at 20% down to prices at 20% down.
As we’ve seen already, prices have normalized since April. The market has truly normalized. A lot of bank economists are calling it real balanced market. That’s healthy for everybody.
I’m sure you Andrew, if you’re reselling a resale property, I’m sure prefer having one maybe two offers rather than 15 to 20. It’s a lot less stress for everybody, right? Things will be normalized and things will get back to normal once lenders kind of figure out ways around these stress tests. I want to bring that up for a second. There are a few ways that you can avoid being stressed out I guess, if you will. You can put down less money and still qualify at an easier method, and I’ll explain that to you later. That’s option one. You can get your parents involved; whether they provide you with more down payment, whether they provide you with some income to help you qualify. You can also co-buy with somebody. Co-buying is trend that coming up more and more, where it’s not necessarily a couple that is buying, but it’s two people who are interested in buying a property.
So there’s always going to innovative ways to get into the market, as long as you are willing to sit down with us and listen and discuss.
Andrew la Fleur: So, you teased a bit there, so let’s hear it. What do you mean by, putting down less money? Because these new rules and this … We’re just in unprecedented times, aren’t we? Where there are now scenarios where the less qualified you are, the more of a risk you are financially; the better the rate you get on your mortgage. It’s just crazy times we live in, isn’t it?
Jake Abramowicz: It’s very odd. It’s very difficult for me explain to a first time buyer. I’m sitting at the table with them and I approach them the discussion of, “How much money do you have down? What’s your down payment?” And a lot of the time they’re embarrassed. People should be very proud of much they save and especially in an expensive city. So they’ll say, “I’ve got $20 to spend. I’ve got 100 grand saved for a $500K place.” Okay. Well then I have to explain to hem that if they put in down, instead of 20%, if they put down 10%, it is easier for them to quality for a mortgage, because the old stress test is easier than that new one. And they’re going to get a basis … A difference of around 30 to 50 basis points. Point per percent, so 30 basis points equals .3% to .5% better on their interest rate. They look at me like I’m an alien and I explain to them. It’s very simple, like you said, it’s all about risk.
The less you put down, you may think you’re more risky, but you’re not. Because the lenders and bankers can sell your mortgage to C&HD, the mortgage insurance company, and literally give none of their funds out. So lend you the money, if you don’t pay the mortgage, they go to C&HD, get their money back in whole or in part. That creates a no risk lending atmosphere for the lender. But as soon as you have 20, 30, 40 percent down; usually the banks have to give their own money out and now you’re a lot more risky because there’s no way of getting that money back if you don’t pay. You got to get power of sale, worse case scenario.
It’s very … Our lending standards right now are kind of toppled on their head. So if a client wants to take a 5 year fixed at 20% down, they have to qualify at 5.39 today. They want to take a 5 to 6 set at 10% down, they qualify for 4.94. That’s around a 35-40 basis point spread in qualifying and that may equal more money that you can borrow. I still can’t really explain this without laughing, but this is the truth, this is our lending situation right now. And that’s how I’m saying, “If you put down less, you get a better rate, and you may be able to qualify for more.”
Andrew la Fleur: Crazy. Now as … I mean that’s the only way to describe it. It’s just so wacky. As condo investors, people buying rental properties; is there a way … Because we have to down 20% as investors. Is there any creative way, and legal ways, to take advantage of what you just described? And somehow put down less money to get a lower rate?
Jake Abramowicz: It’s very, it will be very, very difficult. Investors moving forward will definitely need to shop their stuff around with multiple banks as a lot of banks are now clamping down on many properties one can own. Sometimes they have five, ten, fifteen door limits. There are still lenders and banks that offering very good rates that don’t have any limits that I work with.
There isn’t any way of putting down less unfortunately, as an investor. It’s 20% down minimum across the board. Sure you could do 10% down with a private 10% second mortgage, but it just really doesn’t make any sense, 20% is what your investors will want to have as a minimum down payment. That can be drawn from corporate savings, especially with the tax changes that were kind of rolled back by the federal finance minister. We’re now back to using taxes income, equity from home equity lines of credit for example, a lot of investors are tapping into. You should get those qualified ASAP before the stress test comes in so you can have as much home equity line available for future investments. There is no way of doing less than 20 down on investment properties, unless you live in one of units in the property. Then you could five or ten percent down.
Andrew la Fleur: Interesting. Better back that up and expand on that. Why should real estate investors be in a hurry to refinance their properties or get home equity loans on their properties?
Jake Abramowicz: It’s simple. Again, once the rules come in we’re going to be able to borrow less. If you can borrow less, you can get less of a line of credit limit based on your property. It’s best to examine your options before lenders become conservative staring January. And the truth is that the Oxy … They’re called Oxy B-2 Guidelines that have just come out if anyone wants to Google them in full, that’s the term you’ll search. They say it has to be implemented by no later than January 1. But the word on the street is a lot of the banks are already preparing to do so much sooner.
So if you’re thinking … If you’re sitting on a home net work of a million, you got a mortgage that’s $300, you’ve got a great job, you’ve got some savings, some RSPs; and you’re thinking of starting to get in the market. Or, you already own a few condos and you see an opportunity with them or you want to buy more properties and it’s going to be pre-construction stuff and you’ll need some money for down payments down the road. Right now, you could borrow up to 80% against the value of your home. So we’re sitting on, in this case, $500K available, investible assets.
If that number keeps coming down as rate potentially rise and it becomes more and more difficult to get home equity lines of credit. You may only borrow seven or six hundred or five hundred, as you get knocked down the amount, you’ll have less to invest in the future. Truly the most successful investors are those that are also liquid and cash available because you never know when next opportunity will strike.
If your readers and listeners have the idea of starting this or want to continue it, they should really reach out and get a home equity line of credit secured, ASAP. Here’s the beauty, if you get a home equity line and you don’t touch it for six months or a year or three months, you don’t pay any interest on what you don’t borrow. So the simple fact is, it’s nice to have. It’s a luxury to have. It’s not something you pay for until you use it. So why not to get a line of credit? Why not have it available while it’s there for the taking?
Andrew la Fleur: Absolutely, yeah. It’s a great tool that every investor should have at their disposal. Basically the message here for investors is; these new mortgage rule changes, even though they’re … Everyone’s talking about them as mortgage rule changes. They’re also affecting you on your refinances, on your home equity. Any kind of borrowing related to buying a home, this is going to affect you, so good to be proactive and do this now to maximize that tool that’s at your disposal. As opposed to waiting for next year and then the tool that you can get … You can still refinance, you can still have a line of credit next year, but it’s going to be a lot smaller that amount that you’re going to have access to.
Jake Abramowicz: It’ll be smaller and one thing I forgot to mention is, if your property value decreases by a small margin, again that will affect how much you can qualify for in the future. Now Andrew you just touched on something. This doesn’t just affect buyers, this affects people how already own. A lot of your investors, I’m sur ein the next little while, will have renewals. But do renewals change? With these new rules, it is the belief of many people, again, that these rules will make renewals more expensive. The reason is simple. The banks are not … Let’s call it what it is, they’re not stupid. They’ve got data analytics coming out and they know exactly every profile of every consume that they have.
So if you’re and investor and you’ve got five properties and your renewal’s coming up with your bank for your properties. You’re going to get an offer and that offer may not be as good as what you now have. Or, what you have available elsewhere. If it’s more difficult for you to renew it with another lender. Reach out to me< will tell you what’s the best available rate would be for somebody like you. I’ll tell you that’s a great renewal rate or it isn’t. At least you’ll know, once you’ve shopped around for a little bit, because it’ll be worth your while to figure out.
The banks on the other hand, they’ll know as well how price your renewal. The best thing about Canadian Mortgage when you work is simple, you don’t have to re-qualify unless you’ve missed your payments, sure they may ask you. But if you’ve been a good customer, if you’ve made all your payments on time, a mortgage renewal is simply a matter of signing a piece of paper, a document that you’re extending your contract with the bank or lender. You’ll be in total normal, great shape at renewal time. I say just always shop it around and if it doesn’t make sense for you to leave, I’ll give you that advice. And we can get a better deal, I’ll let you know we can get a better deal because I don’t believe the renewals coming out in the next 12 to 18 months will be very competitively priced. The banks will say it will be hard for these clients to move, lets give him a higher rate than what we would normally give an “A” customer.
So, always shop the renewal around but don’t afraid of staying with your lender if that renewal offer is good.
Andrew la Fleur: Interesting. That’s a great tip there, I’m glad you put that in there as well Jake.
Jake, we’re almost out of time here. Anything else you want to add about the mortgage rules or what’s happening in the mortgage market right now? Anything we didn’t talk about?
Jake Abramowicz: No, I just want to say that the banks and lenders that we deal with are … They’re very creative, let’s just call it what it is right now. They’re smart. They’re creative. They want the business to continue growing. The truth is I expect some lenders and banks to come up with creative way getting either around the stress test or making it less stressful for everybody.
The fact of the matter is, we’ve had a very long, full cycle in this market. The government keeps an eye out on that and that’s why they are implementing these rules. As much as you see the chatter on Twitter and on Facebook, these rules don’t make much sense. We had big rule changes last year. We had another announcement in April from providential government. The market was already returning back to normal. I believe and a lot of others do that this rule change is a little bit of an over reaction. The superintendent of Oxy did say, “We’ll monitor these changes. We’ll see if maybe we’ll roll back some them if they’ve gone too far.”
Mortgages and real estate is a fluid investment. Let’s just keep our eyes out in the newspapers and the news speaking not people like yourself, people like me and we’ll give the kind of unbiased advice out there what’s going on. Just be proactive. Get refinanced. Get your equity ready. Get ready to take advantage of opportunities that I believe will be coming soon.
Andrew la Fleur: If people want to get ahold of you Jake, how do they do that? What’s the best way?
Jake Abramowicz: The best way is to just reach out to me. [email protected] Check me out on Facebook. Facebook.com/MortgageJake. Or just give me a call 416-910-4448. I’m available by text or by call anytime you want to schedule something. I’d love to chat with you about your options and opportunities.
Andrew la Fleur: Awesome, great. Thanks Jake and we’ll have you again on the show soon I’m sure.
Jake Abramowicz: I look forward to it, thank you Andrew.T
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