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Focus on Affordable Housing

  • First National Financial LP

Now, more than ever, Canada needs affordable housing. First National understands this need and in this interview Daniel Bragagnolo, our Director, Commercial Financing discusses the financing complexities of affordable housing and the specialized understanding of the sector First National has developed to add value to affordable housing providers across the country.

Daniel, let’s start with a definition of affordable housing.
In my opinion, it’s an umbrella term that keeps expanding and really describes a whole continuum of housing.  It can refer to social housing including rent-geared-to-income units, assisted-living accommodations, and housing for the middle class that offers just below market rents. I believe all segments of this market will continue to grow in importance.

Do you work across the continuum of affordable housing?
We do. We serve borrowers in many different segments including both non-profits and for-profit corporations.

Affordable housing providers receive funding from various levels of government. Why do they need First National?
Back 40 years ago or so, many not-for-profit organizations entered into what’s now known as Section 95 agreements with the federal government whereby they could access, long-term, low-cost funds to build units financed by CMHC. Those were subsidized loans and came with extended amortizations – long enough for the provider to effectively run their properties, pay off their mortgages and emerge at the end with a stable, debt-free asset. Now those same providers are coming to the end of their agreements and are mortgage free or close to it.  They need capital to renovate their buildings to improve economic viability, enhance energy efficiency or add new units. This is where First National comes in.

What makes lending on affordable housing different than say lending on a regular apartment building?
The underwriting isn’t as simple as a typical apartment building where market conditions dictate the revenue and all rent comes from the tenants.  In affordable housing, that’s not the case. There are many different funding or subsidy pools that affordable housing providers can access. Many times, these funding sources can have various restrictions, so it’s important as a lender to understand each one.  We must know how it may impact the mortgage security and determine if the revenue streams will be stable for the life of the mortgage.  In fact, the most important item in mortgage financing is the revenue of the property. 

Please provide an example.
One example is energy efficiency grants that are available to providers for renovation purposes, but to qualify, the applicant must commit to housing affordability standards for a specific period of time.  This commitment will be registered on title and it is important to read the fine print to make sure additional mortgage financing is allowed.

So this creates complexity.
Correct, and on top of that the sector is not administered the same from one province to the next and sometimes one city to the next.  Initially the federal government provided funds through CMHC’s direct lending program years ago. After that, the feds downloaded the responsibility to the provinces.  Provincial governments also administer affordable housing programs, facilitate the renewal of social housing mortgages and serve as a conduit with CMHC on mortgage financing matters. But each province takes a different approach in delivering their mandates. So, for example, in Ontario, local municipalities became service managers in charge of affordable housing administration, so we have 47 different service managers in the province. In contrast, the Province of British Columbia retained the service manager role through BC Housing.

So knowing where to look for government funding support is important?
Absolutely. As a lender to the sector, we make it our business to understand the different funding vehicles that are available to providers.  We dig deep to structure mortgage transactions for our clients that meet requirements for both CMHC mortgage insurance and various government programs.  We’ve recently seen changes to some of CMHC’s products that allow higher LTVs depending on the use of funds for existing projects and greater flexibility for affordable housing construction for both non-profit and for-profit providers. Overall, it seems to me that government policy as it relates to affordable housing appears to work in 30-year cycles and we’re now seeing the beginning of a new cycle. This time around I believe the success of affordable housing projects will be layering multiple programs together to find financial viability.  We also lend a hand to piece these programs together to help find solutions for housing providers.

Can you provide an example?
We recently helped a borrower connect with the CMHC Innovation Fund.  Fitting a project into this program is difficult.  The client looked at applying several months before they spoke with me and didn’t have much success.  After hearing their story, I thought the program was a perfect solution and set up another call with the client and CMHC. It’s not completed yet, but the borrower is expected to receive about 15% of their project costs from this program.  

Another example?
We recently helped a borrower seek and receive what’s known as a 9(d) waiver to formally waive the province’s obligations under the old federal Section 95 operating agreement. This waiver cancels the indemnity CMHC receives for all losses related to a social housing mortgage. Without the waiver, our client would not have received the most affordable long-term financing available through CMHC mortgage insurance.  Like I said before, this sector is complicated.

So, being an advisor is as important as being a lender?
The two go together. Our goal is not just to provide access to capital, but to provide strategies and innovative advice that results in greater flexibility for providers and helps them achieve their operating goals.  We ultimately make a complex process simple for housing providers who haven’t had to apply for a mortgage in 40 or 50 years. Providing this advisory role in a complex industry is very rewarding, and we are proud to serve a sector whose importance to society is without question.

Given the size and importance of the affordable housing sector, surely First National is not alone in providing mortgage financing.
Many financial institutions are not active in the sector. It’s difficult for them to get comfortable with the cash flow sources for subsidized rental units and consequently it creates significant hesitation for them.

Why did First National choose to get involved?
Our engagement with CMHC for over two decades as a lender on multi-family properties and seniors’ housing created a natural bridge to enter the affordable housing sector. As Canada’s largest CMHC multi-residential lender, we just thought it made sense.

How long did it take for you to familiarize yourselves with the sector?
It took us about 24 months to become proficient at understanding the nuances of the sector and to provide an efficient lending process tailored for providers. During that period, we spent a lot of time calling on federal and provincial non-profit associations as well as municipal service managers and we came away knowing two things: there are a lot of complexities in financing an affordable housing project and there is a real need for it.

How large is the affordable housing financing market in Canada?
In 2016, social housing mortgage pools amounted to about $22 billion. It’s a very significant market and with Section 95 agreements expiring and governments encouraging not-for-profit organizations to act more like businesses, it’s likely to grow substantially over the next decade.

How will rent control in Ontario affect affordable housing?
Many non-profit providers are getting back into building apartment buildings for the first time in 40 years and, in many cases, are doing so with little to no government support.  To succeed, they need to have a mix of market units in their buildings to help subsidize their cash flows.  Rent control will now increase the length of time to lease these market units and therefore increase the budget. It will also limit the flexibility groups have with market units while providing discounted units to other tenants. 

Do you have any words of advice for affordable housing providers who are about to see their federal agreements end?
It pays to seek advice early.  Don’t wait until you think you are 100% prepared before speaking with a lender. If the lender knows the industry well, they will be able to add insight to the information you already have on hand. We sometimes find that affordable housing providers do not know the strength that lies in their assets, particularly given the value of real estate today. They also may not be aware the available options they can take advantage of through new funding programs. In what many economists believe will be a rising interest rate environment, it makes sense to seek early refinancing options and start the process well ahead of the time funds are needed.

Any final thoughts?
Over the years, we’ve used our expertise to fund millions of dollars of first, second and pari-passu mortgages for affordable housing providers across the country and in so doing, helped them transition to a self-sustaining model. Simply put, the affordable housing team at First National has the experience and is open for business.

To learn more about First National’s affordable housing mortgage strategies, call or email Daniel at 416.597.5460 or