CANADA MORTGAGE AND HOUSING CORPORATION recently announced that “Effective September 28, 2015, revisions to homeowner policies in the areas of down payment assistance, market value requirements, share of equity appreciation and monthly subsidy assistance will be made to align CMHC’s policies with the evolving financing needs of the affordable housing marketplace.”
This means that CMHC will now consider up to 100% of gross rental income from a 2-unit owner-occupied property that is the subject of a loan application submitted for insurance.
So what does this mean for Canada’s housing and rental markets?
Well, Canada’s Leading Apartment Finder and Real Estate Marketing Company RentSeeker.ca has decided to provide a bit of insight into the new rules, and how this might impact both Canada’s housing and rental markets.
Let’s begin with why CMHC has decided to allow for this this new provision.
According to CMHC, the new provision “will be made to align CMHC’s policies with the evolving financing needs of the affordable housing marketplace.”
Fiona Anderson, Editor-in-chief of Business in Vancouver says “the new CMHC rule -allowing to use 100% of rental income – is especially helpful for first time home buyers to qualify for CMHC Home Buyers Insurance”.
It’s important to note the conditions for the new CMHC rules – here is a summary of the new rules which can be found on CMHC’s website:
Treatment of Rental Income for Borrower Qualification Purposes — Homeowner (1 – 4 Units)
Secondary rental suites are recognized as a source of affordable housing offered at a cost that is often lower than those for apartments in purpose built rental buildings.
Effective September 28, 2015:
- CMHC will consider up to 100% of gross rental income from a 2-unit owner-occupied property that is the subject of a loan application submitted for insurance. The annual principal, interest, municipal tax and heat (P.I.T.H) for the property including the secondary suite must be used when calculating the debt service ratios.
- For 3 – 4 unit owner-occupied and 1 – 4 unit non-owner occupied properties the net rental income (gross rents less operating expenses) can form part of the borrowers’ gross annual income.
Additional conditions when 100% of gross rental income is used include:
- The income must have been sustained over at least two years.
- The income amount must not exceed the average of the past two years, to address income fluctuations, smooth out cyclical trends and unexpected events such as vacancies.
- Up to 100 percent of gross rental income may be used only where prospective borrowers can demonstrate a strong history of managing credit generally considered to be a minimum credit score of 680.
So how will the new CMHC “policy modification” impact the housing and rental markets?
Well, let’s begin with the housing market:
- Many Canadian economists and others have already been predicting that Canada is in the midst of a “housing bubble”, so this new rule, combined with the BoC’s recent cut in interest rates, is only more fuel for a further increase in home prices, as more first-time home buyers can now use this to assist with their new home purchase.
- Many first-time home-buyers, or even existing homeowners who decide to utilize this new provision and add a rental suite within their home, might not understand what being a “landlord” means. Real Estate Marketing Consultant, Sheryl Erenberg of Sheryl Erenberg & Associates says “I would encourage anyone not familiar with being a landlord to learn more about landlord and tenant laws (governing whichever province they live in). For example, how to deal with a non-paying tenant, what repairs and maintenance you’re going to be responsible for, how much you can increase the rent year-after-year, etc. These are all very important factors to take into consideration before making a decision like this.”
So how will the new CMHC rule affect the Canadian rental market?
- By providing an incentive for home-buyers and home-owners to add a rental suite, while possibly adding to an increase in the cost of housing, at the same time this can also decrease the pressure on the Canadian rental market, which has seen rental rates rising across Canada as vacancy rates decreased due to unaffordable housing opportunities for many.
- On the flip-side, while the new rule might have an impact on decreasing pressure on the rental market in the shorter-term, it might cause apartment owners and developers to possibly re-think plans of developing purpose-built (apartment buildings) properties without the assurance of market demand, and in-turn can cause a shortage of apartments available for rent in the longer term, especially in always-growing metropolises like Toronto, Vancouver, Ottawa, and other major cities across Canada.
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