Now that 2024 is underway and the Bank of Canada has made its first interest rate policy announcement of the year, it’s time to talk about some changes, challenges and opportunities we see ahead for owners and developers of multi-family properties. There are three of note.
CMHC has revised its financial capacity review (FCR) process for users of insured mortgages.
Effective November 2023, CMHC doubled the automatic trigger point for an FCR to $300 million from $150 million. As advocates of this increase, we applaud the change and expect the higher limit will result in a more expedited review process since fewer borrowers will hit the trigger point. However, caution is warranted. CMHC reserves the right to conduct an FCR at their discretion and particularly more likely once your cumulative borrowing amount reaches $150 million. If you fail an FCR review, CMHC will prevent you from receiving insured funds until a new FCR review is completed to their satisfaction, typically 12 months later. Understandably, this can have serious implications for your business and/or your construction projects, therefore it is critical to plan.
To date, we have participated in many FCRs for borrowers across the country. From those experiences, we know the criteria CMHC uses in its review process. While those criteria are transparent and include debt service coverage and a net equity minimum, there are nuances, including different applications of DSC requirements for MLI Select mortgages depending on whether energy efficiency or affordability attributes were used to qualify, the presence of non-stabilized assets and land debt holdings to name a few.
Once you get close to $150 million in insured financings, speak to your First National advisor about the FCR process and how to prepare for it. Similarly, talk to us about your future borrowing strategies and the ways MLI Select can be employed wisely as part of your master plan.
The Bank of Canada may reduce its policy rate. Or it may not. But there is more to this story.
Almost daily, we read articles that speculate about the potential for and timing of interest rate relief. In fact, the media are fixated on Bank of Canada pronouncements. However, the overnight rate – which remains at 5.0% after Wednesday’s announcement – is not as meaningful a proxy for mortgage rates as commentators may suggest. Instead, we watch yields on five- and 10-year Government of Canada bonds as they better reflect borrowing costs over the time horizons associated with most mortgages. As a point of comparison, 5-year bond yields between the end of July and the end of December declined 75 basis points to 3.17% even as the BoC policy rate stayed still at 5.0%. That’s because bond markets are said to have “priced in” three to four interest rate cuts in 2024 on speculation that inflation would abate.
Bond yields will remain volatile in 2024 and if the market has truly “priced in” future rate cuts, then there may not be more rate relief than we’ve already seen. If you plan to borrow, talk to your First National advisor about our Early Rate Lock hedging program. It’s best-in-class and in certain circumstances can be applied up to 6 months ahead of funding to mitigate risk if bond market behaviour runs counter to current speculation.
Construction cost inflation and rental rates are going in opposite (and positive) directions.
First National is well connected in all Canadian commercial real estate markets. As a result, we gather real-time insights and data from a wide range of sources. Currently, what we’re hearing is that demand for construction trades in some markets such as Montréal and the greater Montréal area has weakened due to a sharp decline in housing starts, and for the first time in years, construction inflation is abating. This situation may or may not last but either way, the removal of the federal tax on new multi-family construction projects for the next few years is a helpful incentive. At the same time, we are seeing rental rates in some markets continuing to escalate as demand for multi-family units continues to outpace supply.
Despite economic turbulence, there are legitimate reasons for optimism. Perhaps the best is that the government has recently enlarged the Canada Mortgage Bond program. As my colleague Jeremy Wedgbury reported in his new year’s message
, increasing the annual cap to $60 billion gives First National an additional source of liquidity that we are determined to use in 2024 to support the multi-family property sector.
Now our New Year’s resolutions
At First National, 2024 has started quickly. We recently returned from our national sales conference in Montebello, Québec with our sights set on growing and improving, which brings me to our New Year’s resolutions.
We will always be here for you. Whether you seek local market insights, advice on your next deal, same-day commitment letters, or on-time funding, we pledge to be available to you whenever you need us. It’s a commitment we can make because of the strength of our Québec and Atlantic team and the quality of our lending and servicing processes.
We will live up to our motto of Better Lending. To us, better lending means offering the market’s broadest range of mortgage products (including hedging options) and applying them expertly and creatively to meet your borrowing needs. It also means always striving to be better as advisors who are directly empowered to create value for you.
We look forward to doing what it takes to create a Better Lending experience for you in 2024. Should you have any questions about the developments noted in this letter, please contact me or your First National advisor. On their behalf, I wish you a healthy and rewarding new year.
Michael C. Williams,
Vice President - Commercial Financing - Québec and Atlantic Canada