by Paula Gasparro
Owners of multi-unit residential buildings in Canada who want improved financing arrangements for rental properties can access Canada Mortgage and Housing Corporation (CMHC) mortgage loan insurance for a wide variety of mortgage loans.
Most kinds of residential rental properties qualify for CMHC insurance, including apartment buildings, retirement residences and nursing home facilities. Mixed-use properties (apartment buildings that include commercial space) also qualify where the commercial component is limited to approximately 20 per cent of the total floor area.
Mortgage financing is available for a variety of purposes. For example, you can insure a mortgage loan for the purchase of an existing property or finance the construction of a new building. Mortgage loans for renovations and conversions are also eligible for CMHC mortgage insurance. And if you're thinking of restructuring an existing debt or using the equity in one rental building to help finance the purchase or construction of another multi-unit residential project, you can apply for mortgage insurance to cover the loan as well.
A CMHC-insured mortgage generally carries a lower interest rate than its uninsured counterpart since it reduces the risk to lenders. As a borrower, you can also expect a favorable interest rate at renewal time as the insurance remains in force for the full amortization period of the loan. That means you can make the business decision with greater confidence, secure in the knowledge that where satisfactory repayment history exists mortgage refinancing will always be available.
In addition to the substantial cash flow improvements afforded by lower interest rates, mortgage loan insurance application fees and premiums can be added into the mortgage loan as a non-cash transaction because they are considered soft costs. For borrowers, this translates into cash flow improvements. Best of all, when mortgage loans are insured by CMHC, borrowers can obtain mortgage financing of up to 85 percent of the value of the property with no loan ceiling. That means you can purchase a rental property with only a 15 percent down payment.
Refinancing Options Can Give Your Building a New Lease on Life
Thinking of making improvements to your rental property or using the equity in your building to finance the purchase of another multi-unit residential project? Today's apartment owners have more options than ever for refinancing rental properties of all kinds. CMHC has a rental refinance product that gives prospective borrowers more autonomy with greater flexibility in its premium structure.
You can apply for rental refinancing from CMHC if your rental property has ever benefited from a CMHC-insured mortgage loan, if it's currently encumbered with an uninsured mortgage or if it has no registered encumbrances.
There is no limit to the number of times you can refinance a particular property and no preset restrictions on how the borrowed funds can be used. CMHC evaluates each refinancing application on its merits higher-risk transactions trigger higher insurance premiums. CMHC is also providing premium relief in the form of partial credits on premiums previously paid for recently insured loans on the same property. The Corporation will even insure second mortgages until the term renewal of the first mortgage under certain conditions. This will help clients avoid costly prepayment penalties and gain access to additional funds at the lowest possible interest rates.
How Much Can You Borrow?
If the loan is for repairs and capital improvements, CMHC will insure up to 85% of the current value or up to 75% of the building's improved value while construction is in progress. That figure rises to 85% of the building's improved value once rents have been stabilized for at least one year. (For an extra 0.25% premium surcharge, CMHC will insure up to 85% of the building is improved value during construction.) Refinancing transactions come with a 25-year amortization period, with the option to extend to an additional 15 years with a 0.25% surcharge for each five-year period beyond 25.
Owners of apartment buildings, retirement homes and long-term care facilities have already taken advantage of this refinancing product to undertake energy efficiency retrofits and other building improvements.