Following prior moves to tighten lending guidelines including reducing amortization period, tying qualifying to posted interest rates and numerous other qualifying factors, CMHC now says it plans to get out of the market for second homes and is adding restrictions for self-employed Canadians. Effective May 30, CMHC said it will discontinue insuring second homes and will require self-employed Canadians to have third party income validation.
Second home and self-employed without third party income validation business have accounted for about 1 in 33 or 3% of CMHC’s insured business volumes in units.
CMHC first introduced the program for self-employed people in 2007 in response to “industry competition” which at its peak saw some U.S. players enter the market and encourage changes that created amortization lengths as long as 40 years. The government has since restricted loans to 25-year amortizations. For the majority of self-employed borrowers, income validation is readily available. To validate their income, self-employed borrowers can provide copies of their Notice of Assessment, audited financial statements or unaudited financial statements prepared by an independent third party, for the previous two year period.
The second home product was introduced in 2005 and applied when purchasing an owner-occupied second home anywhere in Canada. CMHC said it will limit the availability of homeowner mortgage loan insurance to only one property (one to four units) per borrower/co-borrower at any given time. What that translates to is that if you own a home with a CMHC insured mortgage, the homeowner now can’t buy another one without selling the first (or refinancing conventionally without insurance).
The question of whether the change will tend to shift risk away from CMHC and toward the private insurers. Whether that is the outcome will be determined by the other non-government private insurers’ responses to CMHC’s move.
CHMC also raised rates across the board effective May 1st. Prior to the announcement in February, the premiums ranged between 0.5 per cent and 2.75 per cent. Under the new rules, they will range from 0.6 per cent to 3.15 per cent. The result is about a 15% increase on average.
*CMHC Second Home and Self-Employed Without 3rd Party Income Validation will remain available for new mortgage loan insurance requests submitted to CMHC before May 30, 2014, regardless of the closing date of the home purchase. As is normal practice, complete borrower and property details must be submitted by a lender to CMHC when requesting mortgage loan insurance.
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