CMHC Policy Changes - November 15, 2024

Appraisals

CMHC will now require appraisals for all multi-unit applications. Previously, applications for multi-units over 25 units did not require an appraisal.

Appraisal reports must be produced in accordance with the applicable industry standards, contain three market valuation methods, and have an effective valuation date within 12 months from the application submission.

Qualifying Interest Rates

For multi-unit applications with terms of 10 years or greater, CMHC is returning to their dual test approach whereby the higher of the market interest rate or the contract rate, will be applied when establishing the qualification rate. For clarity, this is what is currently in-place for loans with a minimum 5-year term.

The larger impact of this implementation will affect decision making for Borrowers picking between 5- and 10-year terms on standard CMHC financing due to the difference in DSCR. This may cause an increased appetite for 5-year term under CMHC Select loans for those seeking leverage. As seen recently, the increased demand for 5-year term has caused market spreads to increase given that upcoming allocations are mostly full.

Environmental Site Contamination

As previously announced on June 4, 2024, CMHC has completed the review of its environmental site contamination policy. CMHC is now accepting applications for construction financing with known site contamination. The first advance will be conditional on confirmation of a contamination-free site prior. This will require updated reports from the respective consultant.

Accessibility Criteria

As industry standards evolve, CMHC is updating the accessibility standards for MLI Select to reflect the most current iterations; specifically, the Canadian Standards Association B651:23 and the Rick Hansen Foundation Accessibility Certification version 4.0.

Bonding and Alternatives to Bonding

CMHC’s construction financing policies usually require bonding of 50% labor/material and 50% performance bonding on all major contracts. Determining whether bonding or an alternative to bonding is necessary to mitigate construction risk will still be at CMHC’s discretion.

Note that bonding or an alternative to bonding is generally required as a pre-condition to authorizing advances during construction and provided clarity as to the types of alternatives that CMHC will accept. Potential alternatives include an irrevocable and unconditional letter of credit (in an amount no less than 10% of the project’s hard costs), collateral security (in an amount no less than 10% of the project’s hard costs), or a reduction of the construction loan amount (in an amount no less than 10% of the project’s hard costs).

For projects up to 24 units; bonding or alternative to bonding may not be required, provided the Borrower has sufficient financial strength, experience, creditworthy sub-trades, at CMHC's discretion.

Rental Achievement

Arguably the biggest advantage of MLI Select Construction Financing when it was introduced in 2022 was the waiver of “Rental Achievement”. The removal of this rental achievement holdback with MLI Select allowed developers access to higher leverage up front, without putting the necessary (and often heavy) equity requirements in all up front.

CMHC is concerned with the changing economic conditions and are modifying MLI Select Construction Financing (including completion take-out) such that advancing may now be subject to rental achievement holdbacks or effective gross income attainment.

For clarity, a rental achievement holdback becomes a condition of the construction advance above 75% LTC or LTV, whichever is less (70% for retirement homes).

For MLI Select Construction Financing, this may limit the up-front leverage for projects, ultimately impacting their viability and cause further delays due to increased equity requirements.

Commitment to Insure

CMHC has finally clarified policy to reflect when they issue a Certificate of Insurance, it is the expectation that the originating Lender funds the loan in accordance with the terms set out in the Special Conditions portion of the COI. The impacts of this policy change is that Borrowers now must stay with the Approved Lender which the COI was issued under. To transfer a COI, an Approved Lender must state a reason for the transfer which is subject to CMHC’s review and acceptance. Only in exceptional circumstances may a COI now be transferred.

We previously spoke about the implications of this change in our previous quarterly Mortgage Insights article. This change will now severely impact pricing transparency as Lenders have to be selected ahead of COI issuance. Oakbank continues to work with their trusted CMHC approved lenders to receive competitive bids for prospective deals prior to CMHC application and this change has not disrupted our process.

Lender Designations

CMHC is modifying its practices whereby Approved Lenders, agents and related entities will be permitted to obtain and/or retain only one designation status (i.e., either Approved Lender or Lender Correspondent) for the initiation stage of MU MLI business activities.

Lenders that have a brokerage division, or vice-versa, must choose whether they want to be Lenders or Correspondents, as CMHC no longer permits the practice of dual designations. This policy change was necessary to support policy compliance and ensure equal status is provided to Approved Lenders and Lender Correspondents, ultimately providing more transparency to Borrowers.

Apartment Construction Loan Program

Along with the changes above, the Apartment Construction Loan Program was also re-vamped, with a new scoring metric that is similar to MLI Select. ACLP is now on a points system based on affordability, energy efficiency, accessibility, along with other social outcome scoring. New to the score sheet is a market/regional factor which seems to be geared more favourably towards markets that have higher need for affordable housing such as Toronto and Vancouver. In addition, options for student and retirement housing have been added for the ACLP program as well. For the new scoresheet and ACLP fact sheet please click here.

If you are seeking information and direction to navigate these CMHC changes or have general questions on CMHC Financing for Multi-Unit properties, contact a member of the Oakbank team.

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