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-financed secured mortgages.
Starting May 30, 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.
As it stand 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. Buyers pay for the insurance, but it’s the lender that’s actually the beneficiary since the insurance covers the company’s losses if the homeowner defaults.
Fewer Options for Second Home Purchases
This latest change marks the fourth 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 less than three per cent of the properties it insures. But the actual impact really depends who you ask.
Recreational Properties Under Fire
Parents: 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.
Cottages: But, for many families, that’s going to be much more difficult now. The same goes for those looking to purchase recreational properties such as cottages or a “pied-à-terre” for those who have to often travel to another city for work. If their existing mortgage is insured, they’ll have to look elsewhere.
Co-Signers: Similarly, parents who have a mortgage that’s insured will no longer be able to act as co-borrowers for their adult children on an insured mortgage. And that’s going to mean more than a bit of scrambling for some families.
Landlords: The changes are also going to affect those transitioning to other properties and perhaps 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.
Financing Costs Will Rise For the Self Employed
This rule change double-whammy means self employed business owners or those looking to buy a second home with less than 20 per cent down will have to look farther afield when it come to financing, says Rob McLister of Canadian Mortgage Trends.
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, he notes.
Canadians that work for themselves can still qualify for CMHC support, of course, providing they can come up with audited financial statements prepared by an independent third party. Otherwise, they’ll likely have to depend on their Canada Revenue Agency notice of assessments (NOAs), using a two-year average of income, grossed up to account for write-offs, he adds.