Investment properties financing rules change

Budding real estate moguls will welcome the news that Canada Mortgage and Housing Corp. (CMHC) has relaxed the rules for would-be Donald Trumps to purchase investment properties with no money down.

The changes apply to rental properties with a maximum of four units, but even The Donald had to start somewhere. CMHC has made the changes with the intention of easing the squeeze in the rental housing market. As long as a prospective purchaser can satisfy a lending institution, typically a bank, to approve the mortgage, CMHC will underwrite it up to 100 per cent. The Crown corporation will even tack the one-time insurance premium on to the mortgage.

As with any mortgage application, borrowers must be able to show the financial institution they have a sterling credit history, which would include a well-paid job, sufficient collateral and financial savings. If they can do that, CMHC will do the rest. And not just for one property, but two or three or more.

Under the Bank Act, all individual homebuyers who have less than 20 per cent of a property's purchase price and borrow the 80-per-cent balance, require mortgage insurance to guarantee the loan in the event of default.

For rental properties up to four units, mortgage insurance is required for buyers borrowing 65 per cent of the cost of the property, but it can go as high as 100 per cent.

A tight rental market in some regions prompted the CMHC to make two key changes to the existing program. First, it extended the amount of insurance coverage it would underwrite and then it reduced the cost of the insurance. Previously, CMHC had capped insuring mortgages at 85 per cent of the loan-to-value ratio.

"We wanted to make the program more attractive for consumers, recognizing that we do have markets out there where anything we could do to ease the housing situation would be a plus," said CMHC president and chief executive officer Karen Kinsley.

The new insurance premiums range from 1.25 per cent to 7.25 per cent and mean substantial savings for investors.

At the 65-per-cent level the premium was lowered to 1.25 per cent from 1.75 per cent. At the 85-per-cent level it was reduced to 3.5 per cent from 4.5 per cent.

On a $1 million property where the purchaser has a down payment of $350,000, the 65-per-cent loan-to-value ratio how requires a mortgage premium of $8,125, instead of $11,375, a saving of $3,250.

On a property of the same value where the buyer has a down payment of $150,000 the 85-per-cent loan-to-value ratio requires a mortgage premium of $29,750 instead of $38,250, a saving of $8,500.

The premiums on the loan-to-value ratios above 85 per cent are: up to and including 90 per cent (4.75 per cent), between 90 and 95 per cent (6.5 per cent) and between 90 and 100 per cent (7.25 per cent).

"Our support for Canadians being able to invest in single or multiple rental projects has been there for a long time," said Kinsley, "but we believe the changes we've made will make it even that much more attractive for them to enter the residential rental market.

As long as the borrower has the necessary collateral to meet a financial institution's lending requirements, we'll guarantee that if that homeowner defaults then we'll reimburse the bank for the full amount of the outstanding loan."

It's early days for the changes, Kinsley said, but the greatest feedback has come from Quebec. She attributed that to the style of rental housing in the province which lends itself to duplexes and triplexes. "You see many people in Quebec who are investors in these small rental type accommodations. Over all, we've seen a significant increase in the demand since the changes were made and that suggests that they have been helpful."

Kinsley is convinced the move to more relaxed lending will not lead to the reckless borrowing that has plunged the U.S. housing market into crisis.

"Canadian banks and insurers have exercised prudence with the qualifying standards and ensured that they haven't assisted people to purchase a home they cannot afford. We've been a bit more conservative in this marketplace," she said.

"We're very pleased with this program. Anything we can do to help rental markets in a prudent way is a good thing."

In 2006, the last year for which figures are available, CMHC issued insurance coverage for 631,191 properties for a total of $291.4 million in premiums. While the corporation has about 70 per cent of the national mortgage insurance market it is the sole insurer of rental properties.

Forty per cent of the mortgage insurance market comes from eastern Canada, including Quebec, about 24 per cent from Ontario and 36 per cent from Manitoba westward.

(prepared by Keith Woolhouse/Vancouver Sun)