Financing for multi-unit (5+ unit) residential buildings comes in two varieties:
- CMHC Insured
- Non-CMHC Insured
People with healthy down payments frequently ask why they’d ever want to pay the CMHC premium if they can simply get a conventional mortgage.
Let’s take a $500,000 loan at 75% LTV, for example, on a 5-unit building. CMHC’s premium is 2.25% for a 25-year amortization. That’s $11,250—not exactly chicken feed.
But here’s the thing. Lenders consider multi-unit financing to be much safer when it’s insured. That means there’s less of a risk premium and borrowers get better rates on CMHC-backed deals. “There is a 200 basis point difference between that and a conventional loan,” First National’s, Jeremy Wedgebury, told BrokerNews.ca.
What many don’t realize is that this 2% rate differential translates into big dollars. On that same $500,000 mortgage, a 2% lower 5-year rate would save almost $34,000 after accounting for the $11,250 premium and CMHC’s $750 application fee. Moreover, the property cash flows better because the payment is 16% lower.
In sum, with multi-unit apartments, “pay to save” is often a good motto.
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More information on CMHC-insured multi-unit financing can be found in CMHC’s Multi-Unit Reference.
Good points on the interest savings overall topping the CMHC costs. It makes absolute sense, and for many first time multi-unit purchasers, and the “highly leveraged” crowd, it can result in huge savings for the borrower. The only problem with CMHC’s Multi-Unit program is the 4-6 week timeline, and many sellers don’t want to wait on a conditional approval that long.
My advice to the buyers is to let your lender know of your intention to apply for the CMHC insured mortgage, but to obtain conventional approval first, and get your financing condition removed. Most lenders’ conventional approvals require the same info CMHC’s Multi-Unit program does, so the lender would then be able to forward your file to CMHC. Worst case scenario, you proceed conventionally. Best case scenario, your loan is insured, the bank feels warmer and cozier, and you get savings.
Question from a first time home buyer – why doesn’t this logic apply to a regular house, too? Thx.
Why are taxpayers insuring investment buildings ?
@mike
CMHC’s insurance is the best way to put taxpayer money into creating more affordable housing, with minimal risk. More supply helps keep rents from skyrocketing.
I frequently choose CMHC mortgages for my investment properties. In the long run (which is my plan) it’s almost always better to pay the fees.
So the taxpayer takes the risk and the investor reaps the profit ?
That sounds a little like profits for the capitalist,s and socialize the loss.s.
Yes. Welcome to North America.
Mike can you please quantify the risk the taxpayer is taking? Please do tell. Everyone is awaiting your analysis.
P.S. Don’t forget to offset it with the billions in profits CMHC is making for taxpayers like you.
Robert,
Speaking about facilitating affordable housing opportunities….
Why do you think that is that CMHC does not want to get into multi-residential market- as a lender? At least for affordable rental housing properties? Freddie Mac and Fannie Mae in the States do that already….
Thank you in advance for your response.
Rusty, Check this out: http://www.cmhc-schl.gc.ca/en/inpr/afhoce/exsoho/exsoho_003.cfm
Thank you.