More on the new CMHC Mortgage Rules for Real Estate
March 9, 2010 by Tessa Corley-Rae
I just spoke with my friend and mortgage broker Terry Caldie from the Mortgage Centre in Calgary about CMHC’s new mortgage regulations for homeowners and property investors. These new rules are nothing to panic about, in fact, up until 2 years ago these rules were exactly how CMHC ran any way. What people have to realize is that Convensional Mortgages (where people place 20% or more down as a down payment) are still exactly the same as they were before. However, the good news is buyers can still avoid CMHC with only 20% down, rather than the previous 25% that was required only months ago for a convensional mortgage. 2 years ago the government decided to create a “stimulous package” for buying property, this was inlight of the down turn in the economy that we have just pushed through. This “stimulous package” included relaxed rules for buying revenue properties, as well as large refinancing options.
Please see below for my interpretation of the new rules:
The New CMHC Rules for buying Real Estate
1) All of the following rules will take effect April 19, 2010
2) Qualifying Rates: All mortgage approvals (regardless if customer is taking a variable rate loan, or a loan of less than the normal 5 year term) will be based on qualifying for a 5 year fixed mortgage – the benchmark rate will be the average of the 5 major banks posted 5 year rate. This will be posted each Monday on a website to be announced later. Previously, you could use a qualification based soley on a variable rate mortgage, or a mortgage that was less than 5 year fixed which usually had a better interest rate. This would have allowed you to qualify for a higher mortgage.
3) Refinance mortgage loan will be a maximum of 90% of the appraised value of a home, although 90% will be only in the circumstances of squeeky clean credit, 85% will likely be what most people could see. The government just simply decided that Canadians were not saving enough! We were always taking the equity out of our homes in order to “buy” ourselves more debt. This is highly dangerous, especially in times of recession when real estate prices are on a downturn. Having equity is a form of savings, and we do need to have a little more cushion for fluctuation in the real estate market. We can look at this as a favor… thanks Canada!
4) Maximum mortgage loan to value for rental (any second home, or home where the owner is not a fully time habitant) will be 80% LTV for 1 to 4 homes.
5) Rental income qualification rule have changed. 50% of the gross rental income from the subject property may be added to the applicant’s gross annual income for the purpose of calculating the borrower’s Total Debt Service Ratio. This has changed from the previous 80% of rental income that could be used to offset the mortgage cost of the home.
For example, with the new rules, if you could rent out a property for $1000.00 / month you can now use 50% (or $500 in the example) and add it to your monthly income to qualify. Previously, with that same $1000.00 / month, you could take 80% of the value (or $800 in this example) and offset the cost of the property, therefore you would have only needed to qualify for a rental investment of $200.00/month.
6) There is now a maximum numbers of homes under CMHC Second Home policy. Second home products only available for 1-home owner occupied properties.
7) Changes to CMHC Self Employed Product will be effective April 9. Also, qualification rules have changed for this product. If a client has been self employed in the same business for more than 3 years, they are NOT eligible under the CMHC Self Employed Product without Traditional third party validation of income (qualified deal). CMHC will continue to require that the borrower have a minimum of 2 years experience in the same field. This can include time spent working as a non self employed worker in the same field. Lenders are expected to obtain a copy of the business or GST license or Articles of Incorporation. Therefore if a client is self employed over 3 years, then you cannot do a self employed product. It must be qualified. If a client is self employed up to 3 years, you can do a self employed product.
8) Commissioned income will no longer be eligible for the CMHC Self Employed Product without traditional third party validation of income.
9) Not so new rules, but in 2008, CMHC dropped 100% financing options and 40 year amortized mortgages. They also instilled a rule that the customer had to have a credit beacon score of 620 or greater (which means good credit, pay your visa bills on time!). The maximum Total Debt to Service ratio is 45% (you can use up to a maximum of 45% of your income to pay for all debt on paper).
In other words,
If you qualify under today’s standards for a loan for 1 or 2 investment properties (whether its a condo, townhouse, older home, student rental or apartment building) that you planned to rent out and hold as long term assets, come april 19, you may no longer qualify to purchase it.
I hope all my readers found this useful. I will try to keep you up-to-date on any further developments.
Kind regards,
Tessa
Tags: Alberta, Calgary, canada, CMHC, Corley, Corley-Rae, First-Time Buyers, Loan, mortgage, Mortgages, Tessa