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Bank of Canada keeps benchmark interest rate at 1.75%

Central Bank has hiked key rate five times since summer of 2017

The Bank of Canada kept its benchmark interest rate unchanged at 1.75 per cent Wednesday, despite a few dark clouds appearing on Canada’s economic horizon. 

The bank has raised its key rate five times since the summer of 2017, attempting to keep inflation in an acceptable range, typically between one and three per cent annually. The bank last raised its rate in October, before deciding to do nothing in December and then again today.

The bank’s rate affects consumers by raising or lowering the rates that Canadian borrowers and savers get for lines of credit, savings accounts, and variable-rate mortgages.

The bank also downgraded its expectations for Canada’s economy this year. A 25 percent plunge in the price of oil since October has had a “material impact” on the economy, to the point where the bank is now forecasting just 1.7 percent growth this year. Three months ago, it was expecting 2.1 percent growth.

But despite that slowdown, the bank still indicated it plans to raise the rate again sooner rather than later. “The policy interest rate will need to rise over time into a neutral range to achieve the inflation target,” the bank said.

At a press conference following the announcement, Poloz said the slowdown in the oil sector is acute, but so far the impact is being offset by strength elsewhere in the economy.

“By all of our readings, something like 90 percent of the economy is operating at capacity, having trouble finding workers, struggling to invest and to grow, and so on. So we have to pay a lot of attention to that, while at the same time acknowledging that the economy will always have the stresses of some form of something declining,” he said.

“There are a whole lot of other things … going on out there that are actually doing very well,” he said, adding that he expects the impact on overall GDP to be less than the oil slowdown in 2014 was because the energy sector isn’t as big a part of the Canadian economy anymore.

 

 

That sentiment buoyed the loonie, which gained about a third of a cent to 75.73 cents US after the decision came out.

Like just about every economist covering the bank, CIBC’s Avery Shenfeld wasn’t expecting the central bank to announce a hike on Wednesday, but he found the bank’s rationale for its decision interesting nonetheless.

“Its message today suggests that it isn’t quite as sure about when it will come off the sidelines and hike again,” he said.

Stephen Brown with Capital Economics had a slightly more subdued take.

“The bank continues to think that further interest rate hikes are necessary, despite a host of factors that are weighing on the outlook,” he said. “But if we’re right that oil and housing will be a bigger drag on growth than the bank expects, then further interest rate hikes are very unlikely and the odds of interest rate cuts will rise in the coming quarters.”

TD Bank economist Brian DePratto said that on the whole, the bank seems to be taking a cautious approach, but is still on a path to higher rates.

“The roller-coaster ride of the past few months has brought a note of greater caution to the Bank of Canada’s communications, and today’s decision looks to be an extension of that,” he said.

“Governor Poloz and company still see more rate hikes down the road, but aren’t in any great rush to get there.”

 

Pete Evans · CBC News · 

Good News for Landlords

2018 forecast: New mortgage rules could be boon for investors

The new mortgage stress test, in addition to rapidly escalating housing prices, is keeping an increasing number of people in rental accommodations, and that’s good news for investors.

“A+” tenants—people with high incomes and good credit—used to rent for about a year before purchasing their own homes, which would repel investors, however, they’re becoming long-term renters.

“With the mortgage rules changing, what we used to consider an A+ tenant, who would usually

 only stay in a rental unit for about a year and then move onto purchasing their own home, are now staying for two to four years on average,” said Crystal Ross, owner of Investors Property Management.

“It’s very good news if you’re an investor. Investors used to back away from A+ tenants because they’d have to find new tenant the following year. I think they’ve given up on the idea of owning a home and decided there’s comfort in being long-term tenant. They’ve accepted the lifestyle.”

 Ross noted that the Greater Toronto Area housing market has normalized, but the new mortgage stress tests will remove about 40% of middle-income earners from the purchasing market. Coupled with a rental shortage in Toronto, they’re looking elsewhere.

“We’re seeing a lot of renters are willing to go outside big cities,” said Ross. “There is a lot of construction and building development being done on the outskirts of big cities, like Toronto and Hamilton.

Peopled aged 25-39 are increasingly putting roots down in smaller towns like Grimsby, Beamsville and St. Catharines.

That doesn’t mean Toronto’s condo market isn’t still the best real estate investment in the region.

“I think the condo market will remain strong because it’s the only market younger people can afford; it’s the first step to getting into the real estate market,” said Engel & Völkers Toronto Central’s Owner and Broker of Record, Anita Springate-Renaud. “Investors will buy them to rent them because there’s a shortage of rentals.”

Springate-Renaud is confident the market will assimilate the new mortgage rules and that market fundamentals, like the GTA being the fastest growing region on the continent, will carry the day.

Montreal has recently emerged as a hot market and Springate-Renaud says that will continue provided things don’t change.

“Montreal is still going up,” she said. “It was depressed for a long time and things would take 

time to sell, but now it’s a hotter in-demand market. As long as the government stays stable and the separatists don’t win, it’s going to stay strong. Montreal is a great place, a fantastic city, and a lot of people are investing there as well. There’s surprisingly a lot of development going on.”

Commercial Mortgages: “How to See the Deal”

When I first started working with Commercial Mortgages about 10 years ago, I had a hard time wrapping my head around what went into putting one of these deals together. Each deal is truly unique and I soon found can have many moving parts. In order to get a better understanding of what I was doing, I needed to put in place a process, or standardized approach that I could follow on all my deals. After a while, I found what works for me and wanted to share this approach. I found that there are several key factors that contribute to a typical deal and how addressing these factors can help you to “See the Deal”.

Since most, if not all commercial mortgages are paper-based and there really isn’t a web-based system like filogix that you can use to enter information into in order to produce a clear picture, the story or summary that is prepared for a commercial deal is very important. This summary gives me a good overview and allows me to “See the Deal” so that when I’m speaking to a prospective lender, colleague or drafting a quick email, I can highlight the critical points fairly quickly and concisely.

One way to “See the Deal” is to use the 3-legged stool or a 3-point triangle like the one at the beginning of this article. Basically, the main points or factors that I work with and focus on in my approach are:

1)     The Covenant

2)     The Income

3)     The Real Estate

The idea is to analyze each point and gather the necessary details for each in order to determine whether that point is weak or strong. What documentation do you need to assess each point? Also, what or where are the risks associated with each point and if necessary how can these risks be mitigated? How can you best sum up each point?

When looking at the ‘Covenant’, consider this;

  • What is the Borrower’s net worth? With commercial mortgage financing, the Borrower’s income is not that important since we don’t rely on their income to pay the mortgage – the property’s rent does. The Borrower’s net worth is more important.
  • Is the Borrower’s net worth all comprised of real estate or is it well diversified? How much in liquid assets do they have?
  • If they needed to inject funds into the property for emergency repairs (ie. Roof or HVAC  system needs a replacement immediately) or they need to cover the mortgage payment from their own resources due to unexpected or chronic vacancy, would they have the funds available?
  • How’s their personal credit? Are their taxes current? Do they have any other sources of income?
  • Etc

When looking at the ‘Income, we typically consider what determines and what can affect the property’s rent and this can include;

  • Cash flow. What does this look like? How much rent does the property generate? What is the likelihood that it will continue?
  • Net Operating Income (NOI), which is Income minus Expenses. The NOI is important since we use the NOI to calculate the two critical ratios used in commercial lending – the Loan To Value (LTV) and the Debt Coverage Ratio (DCR)
  • What are the leases like? Short term, long term? Do the tenants pay for any expenses such as taxes, utilities, insurance or maintenance? Ie. Are the leases Gross, Semi-Gross or Triple Net?
  • Do all the leases come due at the same time, in the same year or are they staggered over several years (this is known as Rollover Risk)?
  • Are the rents belowat or above market rents? How do they compare to similar properties? Are there yearly increases (step-ups)?
  • What type of tenants are they? Weak or strong? For example, Tim Horton’s is a great tenant; stand-alone restaurants, not so great. What’s the history of the tenancy?
  • What is the vacancy like and how has it been historically?
  • Does the client have a properly prepared Rent Roll?
  • Etc

Finally, when looking at the ‘Real Estate’ (which IS the lender’s main security) some of the points to consider are:

  • What type of property is it? Conventional, unconventional or special use? Can it be easily converted for other uses?
  • Where is it located? Is it urban or rural? Is it located in an area with other similar properties? Or does it stand out?
  • What is the property worth? How does the value compare to similar properties? Do we have an appraisal?
  • What is the property’s condition? Are there any major repairs or upgrades that are needed in the short or medium term?
  • How old is the property? Is the property too old to repair? Do we have a Building Condition Report (BCA)? Will we need one?
  • Are there any sources of environmental impact on or near the property? What is located acrossnext to or upgrade to the property? Do we have an Environmental Site Assessment (ESA)? Will we need one?
  • Etc

I’ve ended each section with Etc because by no means did I include all of the possible things to consider or questions to ask.

By being able to “See the Deal” a commercial broker will be able to discuss the file clearly. Discuss the strengths and weaknesses. Discuss the risk factors and what can be done to mitigate those factors. This will also help in gathering the necessary documentation and identify what will be required in order to proceed, quickly and efficiently.

The benefits to developing an approach similar to this are many. This allows for a more streamlined and standardized process which will also make a broker’s life easier when putting the deal together and making the process as painless as possible for the client.

It also instills confidence in the lenders you will be marketing the deal to since it shows some thought and insight into your underwriting. Also, one factor I know is critical with most lenders, is to have some conviction and to believe in the deal; when submitting a file for review I find that really standing behind the deal, “…I recommend the deal based on…..” and list your thoughts goes along way versus saying, “….I have a deal….what do you think……?”. “Seeing the Deal”, makes it easier to stand behind the deal and express why. This will only strengthen your relationship with your lenders.

In the end, this will result in a quicker turn around and the ability to get a better deal for your client.

 

Ermanno Tasciotti  | January 2018

Commercial Mortgages: How Much Down Payment Do I Need?

“It Depends”. These are the two words I frequently use when discussing a commercial mortgage. Whether it’s how much of a downpayment is needed, what the rate is, amortization, etc. It depends.

Let’s consider the first one; downpayment. How much does a client need to put down for a commercial property purchase? When determining this amount, the process isn’t as simple as it is for a residential deal but in some ways is very similar.

Please note that the following discussion pertains to when underwriting a deal based on the property’s cash flow and when dealing with a lender that will look to the rental income as the primary source of repayment.

With residential, the clients can get a preapproved mortgage by calculating how much they qualify for using their income and existing debts. They can then make a Purchase based on their Pre-Approved Mortgage plus their Downpayment.

Simply put,

Preapproved Mortgage + Downpayment = Purchase Price

With commercial, you really can’t get a preapproval since the mortgage is generally based on the income of the property and not the borrower – having said that, I can take the income and expenses on a commercial property and approximate how much of a mortgage it can carry, while not a preapproval, it can give you some guidance – contact me for details!

So you start with a Purchase Price and then work backward similar to a residential preapproval and end up with the Qualifying Mortgage amount and subsequent Downpayment. The process looks like this,

Purchase Price – Qualifying Mortgage = Downpayment

The best way to illustrate this is with a couple of examples. To make things simple I will be looking at conventional and not high ratio financing.

Please note the following terms:

  1. Net Operating Income or NOI
  2. Debt Coverage Ratio or DCR, DSC or DSCR
  3. Loan To Value or LTV
  4. NOI. This is the net income once all expenses pertaining to the property are deducted from the rent collected. Typical expenses can include, property taxes, property insurance, utilities, snow removal, routine maintenance, etc. There will also be allowances made for Vacancy & Bad Debt, Structural Expense and Management. Every deal is different and it depends on the specifics of a particular deal which expenses will be included. Note that these expenses do not include mortgage principal and interest.
  5. DCR. This is the ratio of the NOI to the mortgage principal & interest payments. Depending on the deal, an acceptable DCR would be as low as 1.10 (or 110%) to 1.30 (or 130%). This should always be greater than 1.00 or 100%. The ‘extra’ or excess over 100% is a cushion that gives the lender comfort to account for any interruptions in rent due to high or chronic vacancy, unexpected costs, etc that could reduce the income for a period of time.
  6. LTV. The ratio of the loan or mortgage amount to the lesser of Purchase Price or Appraised Value. ‘Rule of Thumb’ LTVs can range from 60% to 70% for most commercial deals and 75% for multi-family (m/f) properties. (Note this 75% for the example below). Each lender is different.

Residential Example

Clients are looking at purchasing a single-family dwelling. They are preapproved for a $562,500 mortgage (GDS/TDS are in line) and have $187,500 for the downpayment. Using the formula above,

$562,500 + $187,500 = $750,000

Pre-Approved Mortgage + Downpayment = Purchase Price

They can purchase a home valued at $750,000. This works out to an LTV of 75% ($562,500/$750,000). Assuming that the credit is good and the property is acceptable – the deal could be fairly straightforward.

Commercial Example

Now let’s look at a commercial property selling for the same amount of $750,000 and again, the client has $187,500 to put down.

We’ll assume the subject is an 8-plex m/f. The subject is fully occupied with a rental income of $7,200/mo or $86,400/yr. Applicable expenses come to roughly $46,400/yr.

The NOI in this case is $86,400 – $46,400 = $40,000.

I’ll assume that the property is appraised at $750,000. As you will see below, the property value won’t be a factor in determining the mortgage amount. The driver will be the DCR.

Now here’s where they differ. In order to get an acceptable mortgage amount, we will use a trial rate (let’s go with 3.5%) and generate a P&I payment based on a 5 yr term & 25 yr amortization. Working backwards we make sure to stay within an LTV of 75% and a DCR of 130% (In this case – some lenders may go with 120%).

Trial and error yields a mortgage of $515,000, a DCR of 130% and an LTV of 68.7%. Using the formula above,

$750,000 – $515,000 = $235,000

Purchase Price – Qualifying Mortgage = Downpayment

So if they are buying the subject for $750,000 and the property qualifies for and can only support a mortgage of $515,000, the client will have to come up with a downpayment of $235,000 or $47,500 more than they have. As you can see, you just can’t take the purchase price and calculate an amount based on either 60, 65 or even 75% LTV. Furthermore, if the same property sold for $800,000, the mortgage amount is the same since the NOI doesn’t change and the client would now have to put $285,000 down (64.4% LTV).

In this case the client now has three options if they wish to proceed:

1)      Come up with the difference from their own resources.

2)      Secure a second mortgage. This will likely be at a higher rate & fees and note that the lender providing the first may have to approve allowing the second due to serviceability.

3)      Look at an alternative lender (private, etc) that will do the full amount requested ($562,500) or even higher but at a higher rate & fees.

In summary, when calculating downpayment for commercial, treat it like a residential preapproval and work backwards.

  • The ‘client’ would be the property and the ‘client’s income’ would be the NOI.
  • The DCR would be the qualifying ratio much like the GDS/TDS.
  • Once you have a ‘Qualifying Mortgage’ (ie. Pre-Approved Mortgage), then you look at the purchase price/appraised value for the difference.

Now I must stress that the numbers alone DO NOT determine whether or not you have a deal; they’re just a guide or an estimate to get the analysis going. As per the Mortgage Triangle I will discuss in a future post, the Income is one point that must be fully analyzed; there’s also the Real Estate and the Covenant.

I hope this helps give a clearer picture as to how the downpayment needed for a commercial mortgage is determined. As you can see, it depends.

If you have any questions or comments, please feel free to call me at 647.302.8065.

Now is the time to think commercial!

 

By: Ermanno Tasciotti |  January 2018

Top 5 Reasons to Use Mortgage Alliance Commercial Canada (MACC)

At Mortgage Alliance Commercial Canada (MACC) we pride ourselves in providing the best service possible. Our number one source of referral is via word of mouth, hence we make sure to conduct business professionally and diligently so all parties are satisfied. Here are 5 reasons we think you should use MACC on your next commercial transaction:

 

Top 5 Reasons to Use Mortgage Alliance Commercial Canada (MACC)

 

  1. Mortgage Alliance Commercial Canada was voted Canada’s Best Commercial Mortgage Broker for 5 years in a row by Canadian Mortgage Professionals Magazine
  2. MACC is Licensed across Canada with offices in Quebec, Ontario, Alberta, and BC
  3. MACC has maintained privileged relationships with all major lenders across the country to allow our clients to access better terms and conditions for their financing needs
  4. MACC will simplify and manage the entire process of the transaction from loan underwriting to lender negotiations, through to the disbursement requirements to ensure that successful completion and funding of the project
  5. MACC has 30 dedicated and experienced commercial mortgage professional at your service

 

If you have a current project you are working on and would like our assistance or have any questions on the best route to take, don’t hesitate to contact us.

MACC, Your commercial financing solution!

416-499-5454 ext 102

info@macommercial.ca