CMHC again tightens mortgage insurance rules
The Canadian Mortgage and Housing Corporation (CMHC) has once again moved to crimp the residential mortgage market, introducing changes that will soon make it more difficult for many Canadians to obtain government-insured mortgages.
The changes came following the federal government’s decision to tighten the Crown corporation’s mandate as it attempts to increase market discipline in residential lending.
“CMHC helps Canadians meet their housing needs and contributes to the stability of the housing market and finance system,” says Steven Mennill, senior vice-president, insurance, CMHC. “The changes announced as part of the review ensure that CMHC’s products and services are aligned with these objectives.”
CMHC will no longer insure mortgages for self-employed Canadians unless their income is formally validated by a third party. More importantly, it’s not going to provide insurance for existing homeowners looking to purchase a second property.
At the same time, the agency is discontinuing its mortgage loan insurance for the financing of multi-unit condominium construction. This insurance made banks more likely to lend money to condo developers, a part of the market that risks oversaturation.
The good news is that its insurance for mortgage loans to homebuyers wishing to purchase a condominium is unaffected by this change.
As it stands now, homebuyers in Canada are legally required to purchase mortgage insurance if they don’t put down 20 per cent of the price of the home up front. CMHC will now limit its exposure to such loans, however.
It will no longer offer mortgage insurance for homes that cost $1 million or more; limit the maximum amortization period to 25 years; and cap the Gross Debt Service (GDS) ratio to 39 per cent and Total Debt Service (TDS) ratio to 44 per cent.
This latest change marks the fifth time the government — in an effort to dampen what it believes to be excessive speculation in the housing market — has tightened mortgage rules over the past few years. And it’s probably not the last.
CMHC says it doesn’t expect the new rules to have a big impact, estimating that the latest changes would affect only a small portion of the properties it insures. But the actual impact really depends on who you ask.
Instead of forking over even more cash for education costs, for instance, some enterprising parents prefer to buy a nearby property for their children to live in during their university years.
That way, they’ll build up a bit of equity and the kids won’t need to look for a different place to live each year, have to worry about subletting, or figure out how to store furniture over the summer break.
But, for many families, that’s going to be much more difficult now since this would count as a second property.
The same goes for those looking to purchase recreational properties such as cottages or a ‘pied-à-terre’ for those who regularly travel to another city for work. If their existing mortgage is insured, they may have to look elsewhere.
As well, parents who have a mortgage that’s insured will no longer be able to act as co-borrowers for their adult children on insured mortgages.
The changes may also affect those transitioning to other properties and even impact the overall rental market, at least in urban areas.
In the past, someone who owned a condo with an insured mortgage might have opted to rent it out when they bought a house. Trouble is, if they hang on to the condo, they’ll no longer be able to buy that house — at least not with a mortgage that’s insured by CMHC.
These changes mean many Canadians will have to look farther afield when it come to financing.
That means tapping prime lenders who insure through private insurers, mortgage investment corporations that finance with even higher rates and fees, and private lenders who offer second mortgages, predicted.