June 2014. Over the last several months there has been a number of announcements from Canadian Mortgage and Housing Corporation (CMHC), Canada’s public mortgage insurer. The headlines created a lot of noise, confusion and possibly unnecessary concern, in my opinion. Let’s look at how these changes may affect you.
Most recently in early June, CMHC stated that it will align its low-ratio transactional mortgage loan insurance product with its high ratio products by establishing maximum house prices, amortization periods and debt services ratios, effective July 31, 2014. In general, mortgage insurance is required if buying owner occupied property at high ratio, which is less than 20% down payment (more than 80%LTV (Loan To Value)). Rules for that type of transaction were refined last several years, the most impactful change was maximum 25 years amortization. However, there are other programs available for transactions that are ‘low-ratio’, which could be 80%LTV and less. These programs are offered through various lenders and because they are insured, lenders are comfortable offering the loan. These programs are now subject to new rules: maximum 25 years amortization, $1M maximum house price and debt ratios GDS/TDS 39%/44% (more about debt ratio in my blog here).
One such program affected may be rental property (1 to 4 units), however no clear confirmation was received from CMHC at this time and lenders have not advised that any changes are occurring to their rental program policy as a result of this announcement. When I spoke to lenders about this , they expressed that the two other mortgage private insurers, Genworth and Canada Guaranty, will absorb the new business CMHC can no longer serve. Both these private insurers have advised, at this point, that it is business as usual and they are not copying these most recent CMHC changes.
The second change announced by CMHC in early June was that mortgage loan insurance for financing multi-unit condominium construction will discontinue immediately. This does not affect the regular consumer, and even CMHC admitted via their twitter feed that this product has not been provided since 2011. So this is a non-announcement, but perhaps the news headlines made it appear more sensational.
In late April, CMHC announced that effective May 30, 2014, it would discontinue its second home program and its self-employed without traditional 3rd party validation (ie. ‘stated income’). The two other insurers declared that they would be keeping both of their comparable programs, and only tweaking their requirement slightly for second homes (now maximum one unit only in a second home versus 2 units originally). Although CMHC can no longer serve some specific clients, the other insurers still have programs available, and the lost CMHC business will be spread between these private insurers.
The second home and self-employed programs are specific to owner-occupied property, but may affect real estate investors in a few small ways. Parents (or immediate family) may want to buy a second home for their student child, for example, using less than 20% down payment (high ratio). According to CMHC, you can only have one owner occupied insured property with CMHC at a time. So, for a second home, if insured, client will now have to use one of the two other insurers, not so bad, as solutions are still available. Note, CMHC does not limit have many rental properties you have insured with them, this is a separate program. A minimum down payment of 20% is required for rental property (in general, but there are alternate lending solutions that can result in less down payment). However, even if insurable, some lenders will cap out at a certain property count or total combined mortgage loan amount. This is where proper mortgage planning with an investment property financing expert is important, to navigate you through those requirements.
The loss of the CMHC self-employed (without traditional 3rd party validation) program is non-eventful because it was hard to fit into their program to begin with. Genworth’s and Canada Guaranty’s self-employed programs are significantly much better and much easier to qualify. For that reason, CMHC was not getting much business in this realm, and subsequently decided to shutdown the program. One way the self-employed programs affect real estate investors is if a self-employed client is applying for an owner occupied property with rental suite(s).
Lastly in late February, CMHC announced it would increase its mortgage loan insurance premiums for homeowner and rental properties (1 to 4 units), effective May 1, 2014. The other two insurers swiftly followed suit, copying the exact cost increases. The increase was approximately 15% on average, for all loan-to-value ranges. Because the premium is added to the mortgage and amortized over a long period of time, the higher premium results in an increase of approximately $5 to a monthly mortgage payment for the average Canadian homebuyer. For an investment property, it is not so impactful to monthly cashflow, but it does affect the overall cost of the investment. The insurers explained that premiums have not been raised for many years, which is true, and that an increase was ‘overdue’.
A benefit of the rental property insurance program is it allows more lenders to say yes to your rental property deal because the risk is absorbed by the insurance. It also often means better rates and more flexible terms, the latter especially can be very important to a real estate investor. There are also still many lending solutions outside of an insured rental program, many use common sense approaches. So not all bad news, in my opinion, truthfully, no matter how good of an investor you are, you have to understand that collectively rental properties will always be a higher risk for a lender compared to owner occupied property. We may have had some great years in the past where rental properties were treated more like owner occupied properties, but looking prudently forward, one has to assume real estate investors are playing in a different sandbox with different rules.
Looking forward, I expect CMHC to continue to scale back some more, claiming to lower the risk to the taxpayer. The mortgage insurance business will transfer more to the private insurers. This hopefully results in more creative and useful programs from the private insurers and from savvy lenders answering underserved consumers’ needs.
Reference CMHC announcements: