On Friday May 24 the Government of Canada via 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.

My initial thought when I heard the announcement was that our clients purchasing recreational property, second homes for their kids to live in during university, or a home for their elderly parents would either have to work with Genworth or Canada Guaranty (the two alternatives to CMHC), or put down 20% down payment instead of 5%.  Honestly my initial response was that this was not a big deal………Until I read the fine print…..

The fine print of the removal of the CMHC second home mortgage

The fine print and also the most damaging aspect of this change is the 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 your current home is not worth selling
  • Lets say you purchased your first home as a condo a few years ago for $250 000 with 5% down payment and the value today is similar to when you purchased it and your current mortgage is $240 000.   When you look at your sales numbers and factor in your initial down payment and the typical real estate and legal costs to sell your home, you might break even at $240 000, but you would have actually lost your initial down payment of $12 500 so in this case by you selling you are actually losing $12 500.  Many clients in this situation look at the rental market, ensure they are able to pay their mortgage, condo fees, and property tax bills with their new rental income, and then decide to rent the home instead.  By renting the home this property can become a long term investment for them where their current mortgage is being repaid by the tenant, and if the market increases then they gain appreciation as well.  This can be a much more attractive alternative to selling as it maintains the initial principal down payment and builds a future asset base for our clients.  By CMHC making their change, if our client requires a new CMHC insured mortgage, then they are forced to sell their existing home, lose $12 500, and lose the potential for a future larger personal asset base.
• You have co-signed for family member’s mortgage
  • Lets say you have strong income and credit, own your own home, and have decided to cosign for a son or daughter’s first home.  You have done your due diligence to ensure your income and credit are strong enough to be able to cosign for your son’s home and then in two or three years still cosign for your daughter’s home as well.  With this new CMHC change, the government is making 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 LRU or 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, to achieve higher returns on the mortgage backed securities market 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-signed for a child’s CMHC insured mortgage, or buying another CMHC insured residence.

The light at the end of the tunnel after the removal of the CMHC second home mortgage

The ball is really in the court of the other mortgage insurers.  As of today there has not been a response or a change in policy from Genworth or Canada Guaranty.  If they decide to maintain status quo and allow several insured mortgages for each client, assuming the client can qualify for them, then there are realistic and workable solutions to these CMHC changes.  If the other insurers decide to follow CMHC, then we could enter into a period of time where we are brokers are forced to manage the lenders and ensure mortgages are sent to the correct insurer so that our clients are not hurt by the changes imposed by CMHC.  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.

Please always feel free to contact me with any questions about the removal of the CMHC second home mortgage or about anything else to do with your mortgage.