Canada Mortgage and Housing Corporation (CMHC) is a Crown Corporation which administers the National Housing Act and provides mortgage insurance for high ratio mortgages. Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price. Mortgage loan insurance helps protect lenders against mortgage default, and enables consumers to purchase homes with a minimum down payment of 5% — with interest rates comparable to those with a 20% down payment.
Change #1 Elimination of second home mortgage insurance
CMHC now limits the availability of homeowner mortgage loan insurance to only one property (1 – 4 units) per borrower/co-borrower at any given time.
The impacts:
In the past, when some condo or homeowners decided to move to a larger or different property they would retain the current property as an investment, rent it out and purchase a new property to live in. Many of these individuals could not raise a 20% down payment on the new property given that they have equity tied up in the current property. Being able to obtain CMHC insured mortgage supported a smaller down payment making the strategy doable. No longer. Owning a second property will require saving up a much larger down payment.
In the past, when lenders required a mortgage applicant to provide a co-borrower to approve the mortgage, the co-borrower could already have a CMHC insured mortgage of their own. No longer. There will be some (mostly young, first time buyers), who will have to save more, or earn more in order to qualify on their own merits.
Change #2 Elimination of Self-Employed without 3rd Party Validation mortgage insurance
Going forward, to validate your income, you will have to provide copies of your Notice of Assessment, audited financial statements or unaudited financial statements prepared by an independent third party, for the previous two years. Most self-employed individuals maximize business expenses with the aim of reducing income tax. This approach may result in a reduction of the business owner’s mortgage financing ability.
The impact:
It is clear that the federal government is working to ensure that a Canadian version of the recent US housing crisis does not occur. In our view, there is merit to such an approach. That being said, alternate high ratio mortgage insurance companies, Genworth Financial and Canada Guarantee have not introduced similar restrictions yet.
All mortgage insurers increased their insurance rates this year.
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