Interesting move from CMHC

Over the past few years, I believe CMHC has been doing the right thing in trying to “cool” down the housing industry. Removing 100% financing, lowering amortization periods to 25 years for high ratio mortgages and reducing refinancing limits to 80% of the value of your property.

All of this from CMHC was to combat the low interest rate market and the ridiculous inflationary prices seen in most Canadian cities.

So why all of a sudden put in a guideline that will make it easier to qualify for a home?

Well first of all, not as many borrowers or homes will qualify for this anyway.

Here’s some criteria Rob McLister from CanadianMortgageTrends.com has found out so far will be needed to qualify under this program;

The property must be owner-occupied.

The property being insured can have only two units (i.e., a duplex or a single home with a legal secondary suite).

Rental income cannot be used if the suite is “illegal/non-conforming” but “legal non-conforming” is okay. (Non-conforming means that the suite was grandfathered in before zoning/regulations restricted such units. You can check with the city to confirm if a suite is legal.)

The suite must be self-contained with its own entrance.

Property taxes and heat must be factored into the borrower’s debt ratios (which is currently not the case when using rent from legal secondary suites).
For existing units, there must be two-year history of rental income from the suite. The maximum rental income allowed for qualification is a two-year average of the unit’s rent.

For new units, a market rent appraisal can be accepted if an appropriate vacancy rate has been applied to the estimated rental income.
Mortgage applicants must “demonstrate a strong history of managing credit” with a minimum credit score of 680.

What this may do, is possibly stimulate the renovation market. People that were simply thinking about adding a basement apartment or an inlaw suite may just do so now. That being said, you must outweigh the cost vs reward.

Reward; you have a good, clean, quiet tenant that pays on time and you’ve increased the value of your home.

Cost; You’ll need to book an appointment with the Local Fire Department and Electrical Safety Authority to make sure your place is retrofitted. This will most definitely be the determining factor in most newer homes that are too new to be “legal non-conforming”. If you have to renovate to make it “legal”, renovation costs are not cheap. The amount of dollars you put into a renovation project do not always reflect the value you add to your home. Another area of concern is a non-cooperating tenant. Speak with a landlord before you decide to lift up a hammer or call the Fire Department to see if you qualify. Also, you must ask yourself, do you really want a tenant occupying the space where you and your family lives?

I don’t believe it’ll have a major boost to the Canadian Housing Industry. What I believe CMHC is doing is preparing for the future.

Here’s where I insert my devils advocate horns.

The future: Housing crash (or soft landing). Where do you think kids are going to go when they can’t afford their homes when interest rates rise or they simply can’t afford the costs of today’s housing environment? What about career stability? How many of your kids are still in the same job as they were 5 years ago? 10 years ago? When they lose their jobs or their career paths change, where are the going? One in two marriages end in divorce or separation – most people go back to their parents if they’re living in the same vicinity until things settle.

By stimulating this market and making it easier for people to qualify for homes of this nature, there’ll be more homes on the market for people to purchase as a family.

And its just not the kids coming home. Its the parents moving back in with their kids too. Parents may simply want to downsize. Parents may not be around and don’t want to look after a big property as they are out of the country 6 months of the year. Or what if one parent falls ill and they can’t take care of themselves. Alternative living is far too costly for their budget and they’ll need a place to stay.

I think CMHC and our government sees the writing on the wall. The housing industry in general will correct itself sooner than later, living expenses coupled with our debts levels are way too high and our population is getting older.

Interesting twist for sure… and as it always does, time will tell.