Bryan Dudley, Realtech Capital Group Inc.
March 6th, 2009
The current lending environment presents apartment owners with a unique opportunity to improve their cash flow by refinancing at today’s low rates. As many apartment owners will know, lenders price their loans for apartment buildings in terms of a “spread” over Government of Canada (“GOC”) bonds. As a result, other things equal, if bond rates fall, the interest rate on new loans for apartments will fall with it.
GOC bond yields have come down dramatically over the past year. One year ago, 5 year Canada bonds were yielding roughly 3.5% per annum. Spreads at that time were roughly 1% for Canada Mortgage and Housing Corporation (“CMHC”) insured apartment loans and 2% for uninsured (“conventional”) loans. Therefore the rate to the borrower on CMHC loans translated to 4.5% and on conventional loans to 5.5%.
This year the same bonds are yielding approximately 1.7% and have yielded as low as 1.5% in the recent past. Spreads have changed somewhat as well with the spread for CMHC loans moving to roughly 1.6% and the spread for conventional loans going to approximately 3.25%. These spreads translate to rates of 3.2% for CMHC insured apartment loans and 4.95% for conventional loans.
When considering CMHC insured financing one has to add in the cost of CMHC’s insurance premium to the overall cost of financing. For most applications, the premium will vary between 1.75% and 2.75% depending on the length of amortization and the loan to value ratio. These premiums along with the $150 per unit application fee are added to the loan amount, so there is no out-of-pocket expense to the borrower. In the past, when you add in these additional costs for CMHC insured financing it may or may not have made sense to go the CMHC route. Today, however, it’s a “no brainer” in favour of CMHC insured loans. As an example, taking the mid-range premium assumption of 2.25%, the effective cost of a CMHC insured apartment loan when factoring the insurance premium into the rate is approximately 3.5% which is 1.45% lower than the conventional rate noted above of 4.95%. In addition, as the CMHC insurance is valid for the entire amortization of the loan, all subsequent mortgage renewals will also qualify for lower CMHC insured interest rates, offering substantial savings to the borrower.
If you are currently locked into a term mortgage at a higher rate, it may also be worthwhile looking into costs of breaking your existing mortgage, as the interest rate savings may very well outweigh the penalties you will be required to pay.
So how do you get a CMHC insured apartment loan? CMHC does not deal directly with the public but instead deals with CMHC approved lenders and correspondents.
Realtech Capital Group Inc. is an approved correspondent. Apartment owners can contact us to get a “no obligation” assessment as to the amount, rate and other terms which might be available in today’s market should they wish to obtain new financing. If your financing needs are greater than that available through a first mortgage, Realtech also directly funds secondary financing at competitive rates.
There has never been a better time to do it.
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