This Article Appears in our November 2003 Newsletter
CMHC Provides Opportunities With New Rental Refinance Program
By Peter Cook
CMHC has recently introduced new rental refinance policies that will enhance their existing programs and create additional value for multi-unit owners. The new policies are designed to offer greater flexibility for borrowers who in the past had to access the conventional mortgage market at a higher cost.
The new rental refinance program will allow borrowers to take equity out of their properties to 85% loan to value on a first mortgage and 75% loan to value on a second mortgage without CMHC restricting the use of funds. Previously, the program limited borrowers to payout existing registered debt, finance future capital improvement or acquire residential real estate. The purpose of the equity takeout will be a consideration when assessing applications under the new guidelines, however, CMHC will not have a specified list of permitted or prohibited use of funds.
The new second mortgage program will allow borrowers to finance their properties, up to 75% loan to value, and avoid costly pre-payment penalties. Borrowers may obtain second mortgage financing from an approved CMHC lender regardless of who financed the original mortgage. The maturity date of the second is required to match the renewal of the existing first mortgage, at which time they are combined into one CMHC insured first mortgage. Available interest rates will be similar or slightly higher compared to market interest rates that are obtained on first mortgages. It is not a requirement that the existing first mortgage be CMHC insured to qualify for this program.
Borrowers refinancing existing CMHC insured loans will receive partial credits for previously paid premiums. The credits range from 20% to 75% of the original paid premium provided the new refinancing occurs within seven years of the date the initial mortgage was advanced. The new premium payable will be the full applicable premium payable on the refinanced loan amount minus the credit. Borrowers will have the option to waive the credit and elect to pay the premium only on the new borrowed funds if the current loan to value is less than or equal to 65%.
CMHC has waived the rental achievement holdback requirement on construction and capital improvement loans. Previously, CMHC required that a portion of the mortgage proceeds be held back until cash flows had stabilized for a 12-month period. Borrowers will have the option of waiving the stabilizing cash flow period subject to an additional premium surcharge of 0.25% of the loan amount. Benefits to borrowers include access to their full loan amount earlier, the associated interest cost savings and greater flexibility in the project development.
Bonding for contractors and sub-trades has been waived for new construction projects of 24 units or less. Bonding may be waived on projects 25-50 units if construction risk is low or replaced by an acceptable alternative.
Amortization periods can now be extended up to 40 years with a 0.25% premium surcharge for each five-year increment beyond 25 years. Longer amortization periods may reduce the equity requirement on new rental construction projects and assist builders to obtain larger loans.
CMHC’s innovation and insight meets the increasing demands of the rental housing industry. With the current low interest rate market and the requirement for re-investment in the apartment sector, it would appear to be an ideal time to take advantage of the new programs and consider refinancing rental properties.
Peter Cook is the Assistant Vice President of First National Financial Corporation and has over 20 years of experience in the mortgage lending industry. Peter can be reached at 416-593-2913 or 1-800-465-0039.
