GUEST SUBMISSION: On Nov. 15 CMHC announced changes to its multi-unit mortgage loan insurance programs impacting both MLI Standard and MLI Select applications.

Some of the key details you'll want to know are:

Risk-based approach to leverage during construction for MLI Select

Rental achievement holdbacks may now be imposed more often for MLI Select construction applications, based on the risk of the file and at CMHC’s discretion.  These risks include market, project and sponsor risks.

If rental achievement holdbacks are applied, it will require borrowers to achieve a minimum project equity requirement of 25 per cent prior to the first advance, as opposed to only five per cent. Once construction is complete and rental achievement has been met, the balance of the approved loan amount up to a maximum 95 per cent loan-to-cost will be advanced.

Rental achievement holdbacks are already in place for MLI Standard construction loans. These loans are limited to the lesser of 75 per cent loan-to-cost or -value (whichever is lower) during construction and topped up to 85 per cent leverage once construction is complete and rental achievement has been met (i.e. lease-up has occurred to projected rents, less the implied vacancy allowance).

This is comparable to conventional construction financing (i.e. non-CMHC-insured financing) which can range between 75- to 85 per cent loan-to-cost during construction. While CMHC financing may still offer some advantages (materially lower interest rates and single source of financing during construction and take-out), this will likely reduce the proportion of CMHC-insured construction mortgages relative to uninsured mortgages.

If a borrower utilizes non-CMHC-insured financing during construction and then applies for a term loan through CMHC at completion - the application would be classified as new construction and still be constrained to a maximum of 95 per cent of construction cost.

New lease-up regulations

The MLI Select program generally allowed lease-up requirements to be waived for new construction projects.  

Thus, developers could convert their mortgage from a construction mortgage to a permanent (term) mortgage prior to achieving lease up. Purchasing a new, or recently built, multifamily property has also previously not required lease-up.

Going forward CMHC is modifying MLI Select product flexibilities for newly built properties, such that loan advancing may be subject to effective gross income (EGI) attainment more often than before, at CMHC’s discretion.

This would entail only allowing for the conversion of a construction mortgage to a permanent (term) mortgage once lease-up is at market occupancy. Similarly, purchase financing for a recently built property may now also require lease-up to market occupancy levels prior to the loan funding.

In certain cases, short-term bridge loans may be required to help facilitate the lease-up period for a developer-owned project or the purchase of a recently built property. 

Bonding requirements for construction projects

Previously, depending on the risk profile of the application, CMHC allowed lenders the discretion to waive the requirement for bonding on new construction projects.  

Going forward CMHC has indicated that bonding (or an alternative to bonding) will generally be required prior to a construction loan funding.

CMHC has provided clarity on alternatives to bonding, which include:

• an irrevocable and unconditional letter of credit;
• collateral security;
• a reduction of the construction loan amount.

The above alternatives to bonding will be in an amount no less than 10 per cent of the project’s hard costs.  As was previously the case, we understand that CMHC may provide more flexibility for lenders to waive bonding for construction loans with 24 units and fewer.

Appraisals

CMHC previously only required appraisals for properties with fewer than 25 units. An appraisal is now required for all properties submitted to CMHC for insurance (regardless of size).  

CMHC has also added clarity to appraisals requirements;

• appraisal reports must be produced in accordance with applicable industry standards;
• contain three market valuation methods;
• and be completed within 12 months from the application submission date.

CMHC’s primary objective is to ensure consistency, efficiency, and rigour in the approach to property valuation across all building types and sizes.

Accessibility criteria:

CMHC has updated its accessibility requirements to reflect more current standards – specifically the Canadian Standards Association (CSA) B651:23 and the Rick Hansen Foundation Accessibility Certification (RHFAC) Version 4.0.

These new standards have deeper accessibility requirements and may require additional planning, design considerations and potentially increased costs.

Lender designations

Further to the changes effective Sept. 3 regarding CMHC-approved lenders and correspondents (brokers), CMHC has clarified ‘dual designations’ - organizations that do both CMHC lending and brokerage - will not be allowed to do both with CMHC going forward.  

As such, organizations can only have one status, either being an approved lender or an approved correspondent (broker).

This will provide certainty and clarity regarding who will fund the loan, enhances the value proposition of 'pure-play' commercial mortgage brokerages in the market and provides more transparency for borrowers.

Commitment to insure:

CMHC has clarified that when a Certificate of Insurance (COI) is issued – it is with the expectation that the originating approved lender intends to fund the loan.

In exceptional circumstances and within policy parameters, the originating approved lender can submit a request for a new Certificate of Insurance for a subsequent approved lender. Written requests must include the originating approved lender’s rationale for the release of the CMHC loan insurance commitment.

Acceptance continues to be at the discretion of CMHC.

Qualifying interest rates

For applications with terms of 10 years or greater, CMHC is returning to a dual debt-service ratio test approach whereby the higher of the market interest rate or the contract interest rate will be applied when establishing the qualification (ceiling) rate in calculating the debt service ratio.

This approach aligns with the qualifying interest rate policy for five-year terms.  In certain circumstances it may result in application loan amounts being reduced for 10-year terms.

Environmental site contamination:

Going forward CMHC will accept applications for construction financing with known site contamination.

Mortgage loan insurance will, however, be conditional on confirmation of a contamination-free site prior to first advance.

This is a welcome change, allowing applications to be processed sooner than was previously the case.

In closing:

Several of the changes above mean that key flexibilities for loan approvals are now at CMHC’s discretion and will require additional due diligence to minimize the risk of the application.  

As such we believe it is more important than ever to ensure you work with experienced professionals that can represent you and your project as well as possible to ensure your CMHC approval is as favourable as possible.