Speculative real estate activity has long been vilified as a leading contributor to skyrocketing home prices and lack of supply in Canada’s biggest markets; could new restrictions, that will actually effectively curb investor demand, be coming down the pipe?

Recent chatter in the mortgage space posits Canada’s finance policy makers could be mulling over significant changes for borrowing criteria on investment properties:

  • A minimum down payment of 35% (up from the current 20% for non-owner occupied properties)
  • Banning the use of a Home Equity Line of Credit as a down payment source, in addition to borrowed or gifted funds, on an investment property

"It's a Highlighted Issue"

Housing affordability -- and the role investors have played in it -- was a major hot-button issue in the last federal election, with the Liberals campaigning on a number of promises targeting eroding affordability. These included an anti-flipping tax, a temporary ban on foreign buyers (which has already been kiboshed via committee vote), and revisiting the tax treatment of large corporations scooping up properties as holdings. However, it’s since been crickets in terms of any actual implementation... though yesterday’s announcement of a governance deal between the federal Liberals and the NDP -- which vows to “tackle the financialization of the housing market by 2030 -- could breathe new life into some of these promises.

Ron Butler, mortgage broker at Butler Mortgages, says that it’s impossible to know when and how any mortgage measures may be put into place; the timing of the next federal budget, typically held in the spring, has yet to be announced. However, he says, these two particular restriction proposals are prominently on the Department of Finance’s radar, especially as Canada’s big banks are backing the cause.

“I want to be clear: this is a highlighted issue at the department of finance, it absolutely is. It’s false to say it’s not, they talk about this, it comes up in meetings at least twice a month, because the banks never leave it alone,” He tells STOREYS.  “They are genuinely concerned, as a policy issue, about what is essentially 100% financing. Because let’s face it: if you’ve got a HELOC on your house, and you take a deposit out of your HELOC for your down payment on your rental property, and then you get a mortgage on your rental property, you didn’t have any out-of-pocket money involved, did you? It was all financed.”

He adds that while the down payment requirement increase could vary -- in the 25 - 30% range, rather than a full 35% -- the combination of these two measures “absolutely moves the dial.”

In fact, he says, one of the big banks attempted to institute a similar policy in the early months of the pandemic, stipulating that borrowed funds -- including HELOC money and mortgage refinances -- could not, under any circumstances, be used to purchase a rental property. However, when the other large consumer lenders failed to follow suit, they were forced to abandon the attempt.

“I make this point because the banks know about this, and don’t like this, they don’t like 100% financing of rental properties,” Butler says. “Their risk officers don’t, their top management doesn’t, nobody likes it. It’s against all normal thoughtful underwriting policies that you allow 100% financing on rentals. It’s no good in their eyes. But one of them can’t do it by themselves; they need the police, they need the regulator to do it. And I believe they’ve asked -- though I don’t have proof of this - the Department of Finance to do this.”

Navigating the Politics of Mortgage Change

However, he believes the government has been dragging its heels, hesitant to implement dramatic changes as the steam seems to be naturally leaving the market due to a recent influx of supply.

“The politics is, if you do something and the market slows dramatically, or prices reverse in some regions, that people are going to point at you and say, ‘You did it, Liberal government.’ So they would rather wait until the market slows down on its own -- which it appears to be doing, in some ways -- but if it really slows down in the summer, then you can slide this change in to improve the health of the financial system, and no one will say, ‘You caused anything,’” he says.

And, as has been the case with previous attempts to cool the demand side of the housing market, the most notable change will likely be from the psychological shift among buyers, rather than the financial impact of the restrictions themselves. Butler muses that while stricter down payment and borrowing rules could knock 15% - 20% of investors out of the market, likely “50% would be scared out”, pointing to the effects of the foreign buyers’ taxes introduced in British Columbia and Ontario in 2016 and 2017.

However, Mortgage Professionals Canada (MPC) President and CEO Paul Taylor isn’t so sure about the government’s enthusiasm to aggressively target real estate investors. He says that MPC has discussed at length making such recommendations, pointing to similar 40% down payment restrictions recently implemented in New Zealand… but that it’s unlikely that Ottawa will be on board.

READ: MPC Serves Feds Multi-Pronged Approach for First-Time Buyer Support

“It’s in the same sort of vein really, they’re trying to make property more difficult for speculators, and hopefully, there will be less competition for people who actually want to live in those houses,” he says. “But, if you listen to recent statements made by Minister Hussen about not wanting to penalize mom-and-pop investors; they’ve been talking about secondary home owners really creating rental stock, so I don’t think there’s a lot of government appetite to influence something like that here.”

“I may be surprised, but I really haven’t heard anybody, in any of the policy circles that I’ve talked to, seemingly considering that in any meaningful way. I don’t have a crystal ball, but if I was placing bets on measures I might see, I wouldn’t put a lot of money on that particular one.”

Instead, he adds, the feds will likely continue to target foreign ownership, rather than domestic investors. “They don’t really want to see an erosion of property values. They don’t want to target the community of people who are using their homes as a retirement fund. I think you’ll see them more sticking to the foreign buyers’ taxes, and those types of things. I can’t see a down payment change, really.”

Meanwhile, the Office of the Superintendent of Financial Institutions (OSFI) confirmed that while they can’t directly comment on guidance that is not yet published, HELOC use has been a point of focus.

“OSFI has been monitoring the evolution of HELOCs for some time,” wrote Carole Saindon, senior media relations officer, to STOREYS. “Earlier this year, on January 10, in remarks he made to the RBC Capital Markets Canadian Bank CEO Conference, the Superintendent spoke about household credit and the housing market. He cited Combined HELOC loan products and Residential Mortgage Underwriting Practices and Procedures (B-20 Guideline) as two areas that OSFI will focus on. That work is ongoing.”