That’s a lengthy title, but the Canada Mortgage and Housing Corporation (CMHC) made two-announcements-in-one late last Friday. The timing of the news release – on the eve of a weekend – meant it avoided the media spotlight and gave us some time to mull over the implications.
It’s no secret that the government – by way of the CMHC – is trying to limit its exposure to the housing market, and this announcement marks yet another move to achieve this goal.
Let’s review each of the changes, which take effect May 30, 2014, in more detail and the implications for Canadian homebuyers and the real estate market as a whole.
Change #1: Goodbye Second Home Program
You may be surprised to find out that, with the soon-to-be-defunct CMHC Second Home Program, you could essentially buy a second home for yourself, your kids or your parents with the same access and CMHC insurance rates you could obtain on a primary home purchase with a 5%+ down payment. In fact, on the CMHC product sheet, it states there are “no additional underwriting requirements or premium surcharges for a second home – standard product specific premiums apply”.
Officially, you will soon need a 20% down payment to buy that cottage on the lake or starter condo for your kids. Unofficially, the axed Second Home Program has implications for real estate investors. We’ve heard from multiple mortgage professionals that it was not uncommon for the program to be abused and inappropriately applied to purchase rental properties. Under the CMHC Second Home Program, you may have had to declare that someone from your immediate family would be occupying the “second home”, but you did not have to prove it, thus leaving the door open for real estate investors. There are no quantifiable numbers on this misuse, but it did happen.
In CMHC’s official release on Friday, it stated they “will limit the availability of homeowner mortgage loan insurance to only one property (1 – 4 units) per borrower/co-borrower at any given time”. Both cottagers and cunning real estate investors will feel the pinch on that.
Change #2: Goodbye Self-Employed Without Third-Party Income Validation Program
Over the past couple of years, it has become increasingly difficult for self-employed Canadians to get a mortgage, and this move by the CMHC to limit its insurance coverage to those without income validation will only make things harder.
Right now, there are two ways self-employed borrowers can get a CMHC-insured mortgage: 1) with income validation and 2) without income validation. What is income validation? According to the CMHC, “copies of [a borrower’s] Notice of Assessment, audited financial statements or unaudited financial statements prepared by an independent third party, for the previous two year period”. In the second case, self-employed borrowers can bypass income validation with a 10% down payment and a good credit score – within reason. Anyone stating income over $100K faces increased scrutiny.
The CMHC asserted with its news release that the Second Home and Self-Employed Without Third-Party Income Validation programs account for less than 3% of its insured business volumes in units. Further, “given the limited use of these products, their discontinuation is not expected to have a material impact on the housing market”. That may be the facts, but here’s another one: there are 2.7 million self-employed persons in Canada who drive our small business economy – and they may feel otherwise.
Don’t get me wrong: self-employed borrowers will still have access to mortgages with down payments below 20%; they just have to prove two years of income to secure the loan. This is reasonable in theory, but self-employed people have a misaligned incentive to minimize income for tax purposes.
More to Come…
Independently, the two changes for second home and self-employed borrowers may not produce a material impact on the housing market, but combined with the changes introduced over the last couple years, and undoubtedly more to come, there’s no telling where the market will go.
At the bottom of the CMHC news release on Friday, there was another piece of notable information revealed: the Crown Corporation is undertaking a review of its mortgage loan insurance business and these are merely the first set of changes resulting from this review. Who knows what’s in store for us next!