Strategies With CMHC New Multi-Family Rules
This article is written November 9th, 2020. The new Multi-Family CMHC rules on May 28th, 2020 with minimal subsequent changes are summarized here below.
You can only take out equity for the following reasons:
1. To discharge the outstanding balance of existing approved lender mortgage financing (or pay out of short term approved lender financing in the case of a recent acquisition) in relation to the subject Property (as applicable).
2. To secure permanent financing on the subject Property (take-out financing to pay off short-term construction)
3. To undertake capital repairs/improvements to the subject Property
4. To purchase other existing residential rental properties (2 or more units)
5. To undertake capital repairs/improvements to other existing residential rental properties (2 more units)
6. To construct new residential rental properties (2 or more units)
Please note some exceptions:
1. CMHC may consider paying out non-approved lender debt on the subject property.
2. While Equity Take out is NOT allowed, except when equity take out is requested for the subject Property in the case of new construction or a newly constructed building in which case there are no restrictions on use of the funds and the above table doesn’t apply (doesn’t have to be completed but the application has to clearly state it is ETO on new(ly) constructed building.
3. CMHC will consider buyout of interest in the property (ie dissolution of business partnership) as one of the allowed uses of the funds.
We have various solutions:
1) On a purchase.
Current rates for CMHC financing
First mortgages –
- 5 years 1.25% to 1.35%
- 10 years 1.80% to 1.90%
- 65% 1.75% of loan amount
- 70% 2.0% of loan amount
- 75% 2.5% of loan amount
- 80% 3.5% of loan amount
- 85% 4.5% of loan amount
Currently, CMHC approval times are 6 to 8 weeks or longer.
Usually, sellers will not wait that long to have the purchaser waive a financing condition. Therefore, in order to close the deal quickly we can arrange Conventional Financing which as of today’s date current rates are:
- 5 years 2.35%
- 10 years 3.10%
The approval time is only 2 to 3 weeks and equity take out is allowed.
The maximum loan amount is 75% providing there is a 1.20% debt coverage ratio.
Even though CMHC goes up to 85%, with their stringent underwriting criteria and higher cap rates, their opinion of value is usually lower, so the loan amount probably will work out to 75% of actual value. Anyway, we always get an appraisal, even though CMHC does not require it in order to have a schedule of comparison gap rate.
2) On a Refinance / Renovation / Intensification
If you already have a CMHC First mortgage, you can get a CMHC Second mortgage at the same rate as a first mortgage for the renovation/intensification but not for equity takeout. The premium on a CMHC second mortgage is the same as the premiums on the first mortgage plus 0.5% on the outstanding balance of the first mortgage.
Or you can get a second mortgage from a non-approved lender that we have for 1 to 2 years at 6% to 7.5% up to 75% of value that CMHC will allow you to pay off on an exception basis by arranging a new CMHC insured first or second mortgage, after the work is completed and rents stabilized.
As for equity take-out goes on paying off the private second mortgage, CMHC may not question the previous use of funds providing the second was not recently issued, say less than 1 year ago!
3) For buildings that are Repositioning
We can arrange private renovation financing at 6% to 7.5% for a first mortgage or second mortgage up to 75% of completed value, based on cost and projected market rents and expenses, according to appraisal. Once completed and rented, we can refinance conventional or CMHC, depending on what your goals are e.g. short-term or long-term hold etc.