The Rumoured Legislation That Will Change Investing
Written by: Remington Joseph
Ever since it was revealed in January that the CMHC (Canada Mortgage and Housing Corporation) would be reviewing the rules surrounding down payments on investment properties, there’s been a rumour floating around that a new legislation for investors will be put in place that will change down payment requirements to a minimum of 30%. With the requirement being 20% currently, this spike would have a major effect on the real estate industry and the lives of investors, but in what way? We’d like to stress that the possible increase is only rumoured to be happening, and that there has been no official announcement at this time. If the hearsay is true however, these are the changes we believe we’re likely to see.
The Changing Use of Equity
An aspect of the rumour that has raised the most flags with investors is that a home equity line of credit will no longer be allowed to be used as part of their down payment. While this will have an effect on most people who invest in real estate, the people it will likely hurt the most are people looking to invest for the first time, as it’s going to be much more difficult to raise enough capital to meet the new minimum requirement. Fortunately, there is a way around this rule, but it will take time. If the equity drawn has been in your account for at least 90 days, most lenders will give the financing based on the home equity line as a down payment. This won’t entirely take the option away from people, but we believe it will have a major impact on the number of people who would invest using their equity. With the amount of people this could potentially cause an issue for however, we sincerely hope that this does not end up being the reality.
Cutting The Competition
As established investors, the silver lining of the possible new legislation would be the reduction of competition. With a higher barrier to entry, an investor who has been prudent with their finances should still be able to take advantage of a less crowded market. Typically, when a new legislation passes, many investors will wait to see how the market changes before adjusting their strategy accordingly. While that’s a fine plan of action here as well, we also believe that there is value in refinancing as quickly as possible in order to take advantage of some of the deals that will likely pop up in the event that these rumours are true.
The Rising Potential of Joint Ventures
The driving force lobbying behind this supposed legislation is Canada’s own major banks. Using home equity lines of credit or funds from a refinanced property have essentially allowed investors to get all of their financing from the banks without putting themselves at risk. If this new legislation passes, investors will need to start putting their own money on the line. To keep from having to risk too much of their own capital, we believe it would be in the best interest of investors to begin entertaining the idea of joint ventures in order to meet that 30% requirement.
Whether or not these rumours turn out to be true, investors will be able to eventually adapt to the changing market just as they have in the past. While it’s not ideal for anyone, the people who are truly going to have the hardest time as a result of this new legislation will be the casual or beginner investors who are trying to purchase a second property to bring in an extra bit of cash flow or save for retirement. We recommend considering taking out that equity from now and holding onto it just in case, but as always, speak with a professional beforehand to explore your options before making any decisions that can have a major impact on your future.
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