Late last Friday, April 25, the Canadian Mortgage and Housing Corporation rolled out the latest changes to impact home buyers - the discontinuation of Second Home and Self-Employed Without Third-Party Validation mortgage insurance products. These insurance types will no longer be available to mortgage buyers as of May 30, though applications made before that cutoff will be accepted regardless of the closing date.
Who is Affected?
While the CMHC states that these products account for only 3% of its insured mortgage business, self-employed buyers and those looking to buy or co-sign on a second home will feel the squeeze.
If You Are Self Employed: Those who work for themselves have additional hoops to jump through when securing mortgage financing. They must present proof of their working situation, past income, and projected earnings to confirm their status as a qualified borrower, traditionally with the following documents:
- Notice of tax assessment
- Audited documentation proving income and business details, or
- Unaudited documentation prepped and validated by a third party
CMHC’s product allowed self-employed buyers to bypass this validation step if they had a credit score higher than 650, and made a minimum 10% down payment. It’s the second mortgage change to impact this group in as many weeks - proposed changes from OSFI target insurer underwriting criteria, limiting the available qualifying “exceptions”, which self-employed buyers often rely on to obtain their financing.
If You Are Buying a Second Home: Under the new rules borrowers may have only one mortgage requiring default insurance; any additional property purchases must have at least 20% down if the buyer already carries high-ratio financing on another home. For example, a condo owner looking to rent out their unit while simultaneously purchasing and living in another home can no longer do so if their first mortgage requires insurance.
Those carrying an insured mortgage are also no longer able to co-borrow on another home purchase; for example, parents looking to co-sign for their kids’ home purchase can’t if their existing mortgage is considered high-ratio.
Why Has the CMHC Implemented These Changes?
Record-high household debt levels remain a top concern for the Federal Department of Finance and ongoing economic risk for Canada's economic improvement. In 2012, the late former Finance Minister Jim Flaherty tasked the Crown corporation with reducing the risk mortgage borrowing poses to the economy, meaning the insurer must dissuade customers from taking on too much debt and assuming too much risk.
To do so, the CMHC has been assessing its products, targeting those that could promote risky borrowing behaviour. This is the first change as a result of this review, and the insurer says there are more changes to come.
It’s unclear at this time whether independent insurers Genworth and Canada Guaranty will follow suit with their own product lines.