On Thursday, April 24, CMHC announced that they were taking steps that could dramatically affect the ability of Canadians to purchase a new home in Canada. They did this by announcing that they are discontinuing the CMHC second home mortgage program effective May 30, 2014.
The fine print of this change is that CMHC is not just removing the second home mortgage program, they are only allowing Canadians to have one CMHC insured mortgage at any given time. This change affects all Canadians in several areas:
- If you want to rent your current home and buy another property for yourself:
- Let’s say you purchased your first home a few years ago and are looking to rent it out and then buy another home for yourself. By renting the home this property can become a long term investment where the current mortgage is being repaid by the tenant and if the market increases then they gain appreciation as well. By CMHC making their change, if you require a new CMHC insured mortgage, then you are forced to sell your existing home.
- You want to co-sign for a family member’s mortgage:
- Let’s say you have strong income and credit, own your own home, and have decided to co-sign for your son's or daughter’s first home. You have done your due diligence to ensure your income and credit are strong enough to be able to co-sign for your son’s home and then in two or three years still co-sign for your daughter’s home as well. With this new CMHC change, CMHC is having you pick one child or the other, although you can qualify to help both of them, this new policy will not allow you to do so.
- Your mortgage was not CMHC insured – or so you thought:
- Many lenders, over the past several years, have propagated the practice of using Low Ratio Underwriting with many of their conventional mortgages. Traditionally if you purchase a home with 20% down payment or more, CMHC is not involved in your purchase, you pay no premiums, and you do not need their approval – or so you thought. Due to the way that many lenders manage their book of business, the lender will insure your conventional mortgage without you knowing. You do not pay any premiums, but you technically pass through CMHC’s automatic approval system and your mortgage is deemed to be insured. If this is the case, without you even knowing it, you are now excluded from purchasing a vacation home that is insured by CMHC, co-signing for a child’s CMHC insured mortgage, or buying another CMHC insured residence.
What will happen after the removal of the CMHC second home mortgage after May 30?
There will be workable solutions to these CMHC changes as Canada’s two other mortgage insurers, Genworth and Canada Guaranty, have only made some slight changes. Effective May 30, these two insurers will only insure homes with one unit rather than two (such as duplexes) but will still allow several insured mortgages for each client, assuming the client can qualify for them.
The other opportunity that is afforded to borrowers that are working with a good mortgage broker (instead of a bank) is that many banks use CMHC for all of their business or the vast majority of it. This means that clients who deal with these banks could receive a decline from the bank via CMHC where as a knowledgeable mortgage broker could easily obtain their approval through another lender via Genworth or Canada Guaranty.
If you have any questions please do not hesitate to contact any one the our great mortgage representatives which we'd be happy to refer you to.