New Mortgage Rules Could Boost Freehold Property Demand in Cities?
Another major announcement was made by the federal government that could potentially increase the demand for freehold properties in major cities.
Key Points:
Starting January 15, 2025, CMHC will introduce a new insured mortgage refinancing product.
The product is designed for homeowners adding secondary suites (up to 4 units) to their properties.
Homeowners can borrow up to 90% of their property’s value, including the added value from the secondary suite.
The maximum property value eligible for this program is $2 million.
Refinanced mortgages can be amortized over 30 years.
The secondary suite must be occupied by the borrower or a close relative, while other units can be rented out (short-term rentals are excluded).
Will This Push Up Home Prices?
Possibly.
While this initiative aims to make rental housing more affordable, it could unintentionally increase the cost of single-family homes (SFH) in major cities, where they are already in short supply.
Developers typically avoid building SFHs due to low profit margins and prefer building condos or purpose-built rentals instead.
As more homeowners convert their properties into multi-unit rentals, the supply of single-family homes will decrease, potentially pushing prices higher.
Moreover, with favorable terms like 90% loan-to-value (LTV) and 30-year amortization, many homeowners may choose to hold onto their properties instead of selling it when they move out, reducing the number of freeholds available for purchase.
Who Benefits?
This program mainly benefits high-income earners and renters.
To qualify for a mortgage under this program at near maximum loan amount, a household would likely need to earn at least $270,000 per year, even with rental income factored in.
This could incentivize those already buying single-family homes in cities to further invest and accumulate wealth by becoming landlords.
Is This the Return of the BRRRR?
While this program might sound like a way to quickly refinance and pull out extra cash (as seen in the BRRRR strategy), there are limitations.
You can only refinance up to the project cost, meaning any added value or equity can’t be immediately cashed out.
However, there is a risk of people abusing the program, potentially overstating renovation costs or converting primary residences into investment properties. Lenders and CMHC will need to closely monitor the program to prevent fraud.
How Will It Work?
Details are still scarce. The federal government has yet to release full information on how this program will be implemented, so stay tuned for updates!
Read the entire changes here:
https://www.canada.ca/en/department-finance/news/2024/10/mortgage-insurance-rule-changes-to-enable-homeowners-to-add-secondary-suites.html
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