On November 15, 2024, the Canada Mortgage and Housing Corporation (CMHC) implemented changes to its multi-residential construction financing program requirements, to areas such as appraisals, accessibility criteria and environmental site contamination polices, to name a few. Another area that received an update and may be of particular interest to borrowers, developers and investors is construction bonding. In this blog, we’ll explain what construction bonding is, the new requirements and what this means for borrowers.
What is Bonding in Construction?
In the construction industry, bonding refers to a set of financial guarantees that protect stakeholders involved in a project. There are different kinds of bonds, and their purpose is to protect against disruptions or financial loss due to a contractor's failure to complete a project or failure to meet contract specifications.
Types of Bonds in Construction
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Performance Bond Ensures that the contractor will complete the work as promised. |
Labour & Material Payment Bond Ensures subcontractors and suppliers are paid. |
These bonds help manage risk and offer peace of mind to lenders, developers, and project owners.
A Look at CMHC’s New Requirements for Construction Bonding
For the CMHC MLI Select Program, CMHC typically requires 50% labour/material and 50% performance bonding on all major construction contracts and this requirement hasn’t changed. While bonding remains CMHC’s default requirement, they have updated their requirements to include alternatives to construction bonding as well. The alternative options are:
- An irrevocable, unconditional letter of credit equal to at least 10% of hard costs
- Collateral security equal to at least 10% of hard costs
- Reduction of the construction loan amount by 10% of hard costs
These alternatives provide borrowers with added flexibility, but it is important to note that they will only be accepted on a case-by-case basis at the discretion of CMHC.
Working on a Smaller Development?
For projects of 24 units or less, bonding or alternatives may not be needed if the borrower’s financial strength and contractor quality are satisfactory. This provides more flexibility for smaller developers while maintaining adequate protection for CMHC.
Key Factors for this Change
The changes to the construction bonding requirements are part of CMHC’s efforts to continually improve the MLI Select Program – helping at each level of the construction process, from borrowers to lenders and stakeholders.
Reduces default risk |
Provides flexible alternatives for bonding |
Protects the borrower |
Ensures completion of projects |
Special Considerations: Discretionary Bonding Waivers
When CMHC first introduced changes to its bonding requirements, it was initially understood that bonding would be mandatory for all projects. However, in practice, CMHC continues to grant lenders discretionary authority to waive bonding requirements in certain cases. This flexibility is typically influenced by several factors, including the location and size of the project, the type of construction materials used, and the experience of the project manager or general contractor. These considerations allow for a more nuanced approach, ensuring that bonding requirements are applied appropriately based on the specific risk profile of each project.
Helping Borrowers Navigate the Changes
If you’re a borrower or developer, you may be wondering how CMHC’s change to construction bonds will impact your application or project. With this change and added accommodation, there could be a chance that CMHC will no longer accept bonding waivers so it’s best to be prepared for either scenario. For a seamless application process, be sure to have proof of bonding or a combination of the alternatives to bonding prepared for your application. Overall, CMHC needs borrowers to demonstrate that their projects are financially safe.
Whether you’re thinking about beginning a project or already working through your MLI Select application, an MCAP expert would be happy to help as you navigate the process. Reach out to our team to learn more about how we can assist.
