Higher Downpayment For Investment Properties Starting Q2 2023? How This Affects Toronto Real Estate

Higher Downpayment For Investment Properties Starting Q2 2023? How This Affects Toronto Real Estate


The percentage of real estate investors has climbed drastically over the past 2 years, and the truth is that this is largely due easy access to cheap credit. You can borrow a lot of cheap money, essentially free money, if you take into account inflation, which is used to make you more money from rental income and real estate appreciation.

Because of this, more investors have been flocking to real estate, which pushed up demand and the pace of price increases, which then attracted more attention from investors, who invested in the real estate market, and the cycle has been put on repeat for the past two years.

Because of this quick pace of price increases caused by a spike in real estate investors, bank regulators have been looking into this issue in order to slow down investor demand starting last year before rate hikes started happened. Now, even though demand has slowed down since the rate hikes started happened, it looks like the bank regulators haven’t forgotten about the issue.

In fact, OSFI, Canada‘s bank regulator, is finally taking action and has said that they will make borrowing stricter for investors starting in Q2 2023. Honestly, this is all still pretty new, so nobody knows how exactly this will play out.

Right now, what we know is that the bank’s risk allocation for investment properties will be 50% higher than what gets assigned to end-user homes. And this probably means at least one of two things: banks will have to charge higher interest rates and/or require higher downpayment for investment properties to offset this higher risk.

Most commercial mortgages already require a higher downpayment of 35%. If you think about it, real estate investing is like a business, so it’s possible to see a similar higher downpayment requirement. There are also other countries like New Zealand that have already bumped up the downpayment requirements for investment properties recently, so they make for case studies that OFSI can use as a reference too.

Now even though neither increasing interest rates nor requiring a bigger downpayment are good for investors, it’s the latter, increasing downpayment requirements, that will be a lot more detrimental if that actually happens.

So in this video, let’s take a look at what it means for the Toronto real estate market if we end up seeing higher downpayment requirements moving forward

More Demand For Lower Price Property Types

The first and most obvious impact is that there will be a lot more demand for lower-priced property types because that’s what most people can afford moving forward.

Right now, a $1.6M triplex would need $380,000 of capital at a 20% downpayment. But later on, if the downpayment get bumped up to 35%, that triplex would need $620,000 of capital and all of the investors who were able to afford a triplex can now only afford a $1 million house.

What this means is that condos and starter freeholds, like semis and bungalows, will end up getting much more buying action, which means faster price growth in these markets. 

What we’ll probably see is a bigger differences in investment property characteristics. Lower priced properties will see the faster growth but also lower rent yields because of the price premiums.

More Focus On Value Add Projects

The second change we might see for those who can afford those bigger properties with more capital is a shift towards more big value-add properties. Let’s take a step back and look at our current situation where we only need a 20% downpayment. 

Right now, there’s actually less of a drive to choose value-added projects because the renovation money typically needs to come out of pocket, so an investor would need access to more capital to begin with. So even though you can get the higher value add returns, many investors end up choosing turnkey properties because they take up less time and are cheaper to get into.

If we end up getting a higher down payment requirement, what you’ll notice is that the difference in initial capital ends up becoming more similar and this is going to give value-add opportunities a lot more attention and it’s not just because you make more money more quickly with the value add work. 

It’s also because this allows you to build up the equity in your home more quickly. Once you refinance the property after you upgrade it, you get some cash back so you end up having less money tied up in that property. In the long run, you will get better returns with less capital. In other words, there will be much better ROI with value-add opportunities. 

The big problem here is that the barrier to entry is still up there for value add projects. If regulators require a higher downpayment, more people will ultimately be forced to buy condos, so we might end up seeing fewer investors creating affordable housing in freeholds, which is the opposite of what the government’s housing mandate is

In other words, if regulators end up going with the higher downpayment route, then I’d expect to see more government incentives, like tax credits or rebates, specifically meant for mom and pop investors who are up for creating new affordable housing in order to help achieve the government’s housing supply goal. 

Pushed Up Investor Demand Before Q2 2023

The last impact is more of a short-term thing, and we’re already noticing this train of thought once we pushed out this news on social media. 

When more people start hearing about the tighter investment property requirements and we get more specifics confirmed, we’re likely going to see a pushed up wave of short-term demand from real estate investors trying to get in before the regulations change. So if you are looking to get into the real estate market in the near future, now is good time to start looking before more news gets confirmed. 

Right now, we’re seeing a lot less buying activity, and prices are a lot more volatile. What this means is that you can score some pretty awesome deals out there today as long as you are persistent and put in offers on different opportunities. All it takes is one motivated seller and an awesome team to show you what makes a good deal-and we’ve got you covered there!

How We Can Help

Now when you’re ready to start looking for investment properties and you wanna talk more about investing in Toronto, we’re ready for you. 

We can look at your requirements and preferences and then match you up with the best investment property that fits your needs. After we help you buy it, our team also provides renovation guidance, leasing and property management if you need it. Just connect with us if you want to learn more about our services!

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