As CFAA reported on June 2 and June 17, CMHC ruled on May 28 that its mortgage insurance cannot be used for upward re-financing to take out equity from rental properties of 5 units or more. Generally, equity can only be taken out (using insured funds) on the first insured financing of a new residential rental building, or after a purchase closed with uninsured funds and equity. In all situations, uninsured funds (“conventional funds”) can be used to take out equity, but that is more costly than using insured funds.

For the clarifications CMHC has already issued, review CFAA’s e-Newsletter of June 17, or see CFAA’s previous post on that topic. Those clarifications mean that for growing rental housing providers with significant portfolios of properties, the new mortgage insurance use of funds rules will cause little difficulty in most situations.

CFAA is seeking additional clarifications to deal with some unintended consequences that will likely interfere with the use of insured funds to improve rental buildings, to develop new rental buildings, or to maintain leverage. The leverage issue could easily apply to large providers. The other two issues are of the most interest to rental providers with a small number of properties. Here are descriptions of those roadblocks to investment, and CFAA’s proposed solutions.

Before May 28, a substantial amount of investment in new construction was organized by people who already hold rental housing investments in a partnership or “syndicate”. When a new opportunity comes along, many of the people in the partnership or syndicate want to invest in the new project, but often they do not all want to invest in it. Before May 28, everyone in the group may have all signed for an upward re-financing, and most of them put their equity take-out into a new building.

Under the new rule, the whole upward re-financing may well not take place, because it will be more costly, and thus the new investment in rental housing may well not take place.

Buildings often require major repairs or benefit from energy upgrades (i.e. capital expenditures or “capex”) at various points in time, which often do not correspond to a re-financing date. Under the pre-May 28 rule, owners did repairs at the optimal time: no sooner than the repairs were needed, but as soon as they were needed. Owners injected equity or borrowed money to fund the work, and then most owners took the equity back out or refinanced the debt at the next insured re-financing.

Under the new rule, some work may be advanced, but other work will be delayed. Both changes raise capital repairs costs over the life of the asset. The delay will also interfere with building upgrading and modernization.

Rental owners with portfolios manage the portfolio as a whole. Since rental returns on residential rental properties are stable, the rate of return is usually relatively low on the price of the asset. To achieve competitive returns, rental investors use leverage. Prior to the rule change, leverage was sometimes maintained by using equity take-out on one building to pay for principal repayments on other buildings. According to a CMHC clarification, that is not regarded as a permitted use of funds. That position effectively forces equity to be injected into rental investments. In turn, that will tend to make the investment less attractive, thus reducing investment and new supply, and raising rents.

What CFAA members would like to see

CFAA is seeking clarifications to the new rules to allow the following as permitted uses of funds from insured upward re-financings:

  1. Investment in rental housing when at least as much money is invested as is taken out, regardless of whether some of the money invested is invested by different people (to reduce the “syndicate problem”);
  2. Reimbursement for capex performed since the last insured re-financing; and
  3. The payment of principal amortization at other properties (to maintain leverage across a portfolio), or for single building owners, achieving more leverage (up to a reasonable limit as a percentage of market value).

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 communicate with your CMHC representative. Or you can reach out to a CMHC representative who will ensure that your input is shared with the appropriate teams within CMHC. You should share your concerns with CMHC as soon as possible, and in any event by August 5 or 7.

Sending a copy of any submissions you make to CFAA would also be helpful. Please e-mail us at admin@cfaa-fcapi.org.


CMHC’s mortgage insurance is an important government contribution to making investment in rental housing attractive, and thus to encouraging investment in new rental supply and in upgrading and modernizing existing rental buildings. That contribution is important for rental investors, residential tenants, the economy, society and the government itself. CFAA wants to work with CMHC to make that contribution as useful as it can be for everyone affected.