Stricter Mortgage Rules in Canada - good for Investors!

[Ryan Kirk]

It's getting harder to buy a home in Canada, which is great for investors! Canada Mortgage and Housing Corporation (CMHC) insures mortgages with less than a 20% downpayment, and they are tightening up the qualifying rules.

Starting July 1, 2020, at least one applicant for an insured mortgage with CMHC will need a credit score of at least 680, up from 600. Also, the total debt service ratio is being lowered from 44 to 42, and the gross debt service ratio from 39 to 35. In addition, buyers will no longer be able to borrow the down payment from 'non-traditional sources.' In effect, buyers will need to be in better financial standing in order to qualify for a home purchase with a low downpayment.

Real estate investors are already required to put down 20% on every purchase, so these CMHC changes won't directly impact investors. However, the rule changes will definitely impact the real estate market as a whole, and the impact will be positive for investors, for the following reasons:

1. Decreased demand for starter homes
First-time home-buyers will feel the effects of the mortgage rule changes the most, as they must now reach a higher level of financial health. First-time buyers will be forced to wait on the sidelines while they improve their credit score and debt service ratios, or save up a larger downpayment. This decreased demand will inevitably lower prices, creating opportunities for investors who want to add some highly-liquid single-family homes to their portfolio.

2. Increased demand for rentals
As buyers wait to meet the new qualifying standards for purchasing a home, many of them will continue to rent properties. Investors benefit when rentals are in high demand because they have a larger pool of potential tenants to choose from, and opportunities to increase the rents to match the increased demand.

3. Long-term Stability
Though a market crash provides opportunities to buy properties at a steep discount, overall economic stability is something all investors should desire. It's reassuring to see policy makers and finance leaders taking preventative measures to avoid a real estate bubble and a repeat of the 2008 financial crisis.

2020 has been full of surprises and uncertainty, but the changing conditions may be ideal for well-positioned real estate investors to grow their portfolio. Now is the time to organize your finances and prepare to capitalize on falling prices across many markets in Canada this Fall.