CMHC’S NEW USE OF FUNDS RULE FOR INSURED BORROWING

Background

On May 28, CMHC issued a notice to rental owners who have pending applications for CMHC mortgage insurance for re-financings under CMHC’s Multi-Unit Mortgage Loan Insurance (5+ units). Prompted by an acceleration in applications for refinancing, CMHC imposed a new restriction prohibiting the use of upward re-financings for equity take out. Under these new rules, upward refinancing proceeds can only be used for a permitted purpose which supports the provision of housing in Canada.

See https://cfaa-fcapi.org/cmhcs-may-28-announcement/ for more details.

CMHC’s clarifications

On June 5, 12 and 15, CFAA met with senior CMHC officials, as well as the working group responsible for implementing the new rule. For rental housing providers, the key take-aways from those meetings are the following. At this time, subject to the usual underwriting tests, CMHC is saying the following:

  • 1. Insured upward refinancing proceeds can be used for capital repairs or improvements anywhere in a borrower’s rental housing portfolio in Canada, i.e. the use of funds is not limited to the specific property used as security.
  • 2. Upward refinancing proceeds can be used to fund the acquisition of a new residential rental property anywhere in Canada.
  • 3. CMHC is not imposing any restrictions on the use of a conventional second mortgage to take out equity. That is up to the Approved Lender who has provided the insured (first) mortgage loan.
  • 4. The relevant tests will generally be applied by the Approved Lenders, rather than by CMHC directly, although Approved Lenders may seek clarity from CMHC on its expectations, either generally or on a transactional basis.
  • 5. The relevant test will be applied at the level of a group of associated companies. There is no intention to get into the details of corporate structures.
  • 6. Exceptions to the new rule may permitted on a case-by-case basis (such as funding to deal with COVID-19 rent shortfalls).

  • 7. Upward refinancing proceeds on any property can be used to fund the construction costs of a new residential rental anywhere in Canada.
  • 8. The initial insured financing of a newly developed residential rental property can be used for an equity distribution.
  • 9. If a property is intensified, a new CMHC-insured mortgage can be arranged to refinance the whole property (existing plus newly developed units). However, an equity take-out without the restrictions on the use of funds can only be made with respect to the new units created.

  • 10. Buildings often require major repairs or energy upgrades (i.e. capital expenditures or “capex”) at various points in time which often do not correspond to a re-financing date. CMHC is currently reluctant to see upward re-financing applied to take out equity, even if it is to repay equity injected or income which was left in a property to pay for capex. There may be some scope for looking backwards on a limited and transitional basis, but not on a continuing basis going forward, although insured financing can be used for future planned capex going forward. CFAA notes that rule will likely interfere with timely capital maintenance.
  • 11. An upward refinancing on one property in a portfolio cannot be used to pay regular principal amortization of a borrower’s other CMHC insured loans. CFAA notes that will decrease leverage in rental portfolios.
  • 12. Point 5 above may not be sufficient to allow equity take out by group of co-investors for some of them to re-invest in other properties or in a new development. CFAA notes that would likely reduce investment in new rental housing construction.
  • 13. At this time, CMHC does not intend to provide an exemption for small buildings (up to say 20 units).
  • 14. At this time, CMHC does not intend to provide an exemption for buildings which currently have a low leverage level.
  • 15. CFAA notes that by restricting equity take outs, the new rules will likely discourage people from investing equity into rental housing, thus reducing rental supply and raising rents, which is contrary to general government policy and CMHC policy.

Providing input

CMHC is holding consultations about the new rules, and about possible other revisions to their insurance products. If the new rules concern you, you should participate in those consultations, or communicate with your CMHC representative. You can also communicate your concerns to your usual lender, and ask them who to contact at CMHC. Or you can reach out to a CMHC representative who will ensure that your input is shared with the appropriate teams within CMHC.

Steps from here

CFAA has always had a strong, positive relationship with CMHC. CFAA is communicating our concerns to CMHC on an on-going basis, to seek to avoid unintended negative consequences for rental housing providers, investors, renters and the community. CFAA wants to encourage a continuation of the strong investment climate which has been instrumental in drawing out more much-needed purpose-built rental supply.

CFAA will advise further as more information becomes available and can be disclosed.