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Times are changing, and the world of mortgages keeps pace. You may very well know
from reading this column, that Consumers attempting to buy with less than 10% down had to
cope with a Canada Mortgage & Housing Corp (CMHC) imposed maximum sale price on the
dwelling (residence) of $175,000 in urban Ottawa and $125,000 in rural Ottawa. As of
this month, the ceiling has been raised to $250,000 and includes various Townships that
had eluded the $175K maximum. These Townships include West-Carleton, Goulbourn,
Osgoode, Rideau, and Russell. Since the news is so recent, you may run into some
opposition from your mortgage lender who may not be aware of the change. You cannot reach
CMHC yourself, the loan request must come from your lender. The rules for personal
qualification have not changed, your mortgage is still subject to you proving you can
afford the venture. The proof is still based on the house mortgage costs, inclusive
of taxes and heat, not surpassing 32% of your gross income (net income for self-employed
individuals), and all your instalment debt payments, inclusive of the house, not
surpassing 40% of your gross pre-tax income.
Other changes at CMHC involve allowance of small rental properties within their insurance
mandate. CMHC's purpose (mandate) is to protect lending institutions against losses
suffered in a default situation. Lenders do their best to underwrite loans
(mortgages), but nobody knows what the future may bring. Any amount of normal
financing that exceeds 75% must be insured against default, while small rental property
lenders would feel more comfortable having CMHC coverage on loans above 65% financing.
Small rentals are defined as rental properties of 1-4 units where the owner does
not reside on site, or 5 and 6 units whether the owner is present or not. The fees
for CMHC have been recently upgraded to allow for this type of product. The
underwriting fee (study fee) is basically $150 per unit, with a minimum of $600.
Over and above this latter fee is the insurance premium which can be added to the
loan. The higher the loan-to-value, the higher the premium. The breakdown is
as follows:
LOAN TO VALUE RATIO
Up to and including 65% 1.75% of the loan amount
Up to and including 70% 2.00% of the loan amount
Up to and including 75% 2.25% of the loan amount
Up to and including 80% 3.50% of the loan amount
Up to and including 85% 4.50% of the loan amount
Investors should also be aware that CMHC will insist that the personal net worth of the
individual buying or guaranteeing the loan is at least 25% of the required loan or
$100,000, whichever is the lesser. Included in net worth calculations, RRSP's count
at 50% of value, vehicles at 90% of value and raw land at 50% of value. In other
words, if you want to buy investment real estate, but your net worth is not at least
$100,000, don't apply for more than conventional financing (up to 75% at various lending
institutions). There are other guidelines which must be met such at minimum debt
service coverage, which your lender must take into consideration before submitting the
file to CMHC. Again, you must remember that you cannot approach CMHC on your own,
the request must be through a CMHC approved lending institution. The minimum
required down payment must be 15%, but contrary to homeowner loans (mortgages), this
amount may be borrowed, as long as debt service ratios are met.
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