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.
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:
- 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”);
- Reimbursement for capex performed since the last insured re-financing; and
- 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).
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 firstname.lastname@example.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.