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Ruling Out Fun?

Are the new mortgage rules hindering investment in recreational real estate?

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The new mortgage rules have been in effect since last October. Now, one year in, Edmonton is monitoring the potential impact on local and foreign investments on Lake Country’s recreational properties.

“The new mortgage rules that came out in October were intended to ensure Canadians can get into a home that fits their budget,” explains Stacey Shepherd, mortgage associate, Dominion Lending Mortgage Mentors. “They have also come around to help cool the housing market in certain areas, like Vancouver and Toronto. It was called the stress test. In order to qualify for a mortgage with Canada Mortgage and Housing Corporation (CMHC) insurance (when you have less than 20 per cent for a down payment) the rate you have to qualify at now is 4.84 per cent—even if your mortgage payment is at 2.99 per cent.

“The next wave of changes affected the conventional mortgages, where you have more than 20 per cent for a down payment. Banks used to be able get CMHC insurance on these mortgages. The new rules state that the banks raise the insurance premiums the banks pay on these mortgages, which is why the rates are higher.”

Shepherd continues, “The impact to Edmonton and the surrounding market has been felt in the amount clients can purchase. Clients were pre-approved last year for $440K—and now they can only be approved for $380K.”

Douglas Lim, partner at Mortgage Alliance Lending Advisors, agrees that the mortgage changes create some challenges for Edmonton’s real estate market.

“The new mortgage rules,” Lim explains, “apply to residential mortgages (one-to four-unit dwellings), home equity line of credit (HELOC), and any loans that are secured by residential properties.”

Lim goes into more detail on what the mortgage changes entail: “Using the Bank of Canada’s benchmark rate for total debt service ratio (TDSR)/gross debt service ratio (GDSR) calculations instead of the discounted rate, stronger income is needed to qualify through the stress test. For instance, using discounted rates (2.89 per cent) on a $100k mortgage, a $467.62 payment would be used in TDSR/GDSR. Now, with the stress test (4.64 per cent), that same $100k mortgage results in a $561.28 payment to be used in TDSR/GDSR,” he explains.

“The mortgage changes affect all properties regardless of use,” says Lim, who adds that there is now “a tougher qualification process for self-employed individuals who used to declare higher income than what can be supported through their documentations. The higher the income needed to qualify, the less opportunity there is to draw equity from HELOC due to lower readvanceable limits.”

Property selling is impacted as a result. “With tougher guidelines, it decreases the number of qualified buyers,” says Lim. “The intention for the rule change is to improve the strength of the banks and lender’s mortgage portfolio so that investors will keep their confidence levels up in our Canadian mortgage investments. It will also ensure the mortgagor’s affordability in the event of interest rate hikes, which can result in higher mortgage payments. It also enables first time homebuyers to force save higher down payment amounts in order to qualify.”

While there are some advantages to the mortgage changes, one of the biggest impacts, Lim explains, is that there will be “fewer qualified buyers, which will result in slower housing market activities.” In addition, he notes, “Self-employed property investors will not have the flexibility to buy and sell properties that they use to have before rule change, but the positive outcome is that home prices have decreased, and that has helped affordability for new home buyers that are not affected by the rule changes.”

Denise Wareham, mortgage specialist at ATB, hasn’t noticed a significant impact on foreign investment in Edmonton’s Lake Country recreational properties as a result of the mortgage changes, but it admits it depends on the marketability of that area.

“The biggest impact would be for the new home buyer. I have run into problems where first time home buyers who qualify under the new government rules have had to lower the purchase price they may be seeking,” Wareham notes. “However, I do not always run into this with established clients who are looking for recreational properties, since they are typically older clients with little debt.”

“There definitely has been a decrease in the number of recreational properties being sold,” observes Mark Barron Wilbert, partner at Coldwell Banker Venture Realty.

The decrease, however, may not be solely tied to the new mortgage rules, as Wilbert explains. “It is partially due to the mortgage guideline changes, but it is also important to note that the amount of interest has also decreased, depending on the location. There are definitely some hot spots across Alberta, though, that continue to outperform previous years. This may be due to the low loonie and tourists visiting, along with the fact that locals are going to the lake for the weekend instead of travelling to Mexico for the week.”

What does this mean for Edmonton’s Lake Country recreational properties in particular? Wayne William Heine, REALTOR® with Re/Max Excellence agrees that the popularity and nature of Edmonton’s Lake Country recreational properties may be saving that particular real estate market in the midst of the new mortgage rules.

Heine became a lake specialist when he decided to cater his real estate business 100 per cent to Edmonton’s Lake Country. In 2013, Heine was presented an inaugural marketing award for the job he did out at the lake. Today, the Edmonton Lake Property team works with Lake Wabamun, Lake Isle, and Lac St. Anne, along with all the communities and recreational properties within a couple miles of the lake.

“Recreational property is typically purchased as secondary homes for most people,” Heine explains. “We usually don’t find financing to be a problem in our sales. We also see a lot of first time home buyers choosing Lake Country as their primary home and commuting into the city. This affords them more choices (and more home) for less money then a city home would normally cost.”

He jokes. “Locally, we don’t now or ever see much foreign investment—unless you want to include Calgary!

“As for foreigners buying lake property, it isn’t very common. We do get people from Calgary or Fort McMurray; however, this is generally the extent of our non-local buyers.

“We have actually seen a positive increase in values, specifically at Lake Wabamun and Lac Ste Anne. More buyers are zoning in on the fact that these are the places they want to live. We have also seen a good upward trend at Lake Isle. Each lake offers a different lifestyle, and we zone in on what people need to help them in buying the right lake property for their individual needs.

“Anytime you make it harder to purchase a home, you do see a drop off. We are lucky, though. Since Lake Country tends to be more of a luxury market, we tend to be less affected. This is largely due to scarcity. Within a 50-mile radius of Edmonton, there is a limited supply of good lake front or lake communities to live in. Every year out here, more and more people are discovering us. It’s like ‘musical chairs’,” he laughs. “There are only so many—get one while you can because prices are going up!”

Other factors in the continuing success of the real estate market in Lake Country include the fact that, “Lake living is less than an hour away, with options for everyone,” Heine points out. “As well, local on-call medical professionals like being at the lake as it is only 45 minutes away, should an emergency occur.”

Heine concludes, “Lake Country has always had a built in following, and now with more publicity finding us, plus a reputation for having excellent water quality for all summer activities, we are only going up.”

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