On June 4, 2020, the Canadian Mortgage and Housing Corporation (CMHC) announced changes to the eligibility rules for mortgage insurance, in the agency’s latest response to the COVID-19 pandemic, mortgage deferrals, and what they see as increase risk of mortgage payment default.
The new rules will lower the amount of debt an applicant for an insured mortgage can carry, set a higher credit score to qualify for CMHC insurance, and will require a homebuyer to use their own, and not borrowed, funds for their down payment.
Here are some key points and understandings you should know about regarding the CMHC Changes and how the industry is reacting:
Who is CMHC
CMHC (Canadian Mortgage Housing Corporation) is a Crown Corporation and one of three mortgage default insurers in Canada.
If you have a down payment equal to less than 20% of the purchase price of a home, you are obligated to take on default mortgage insurance. This premium is incorporated into your monthly mortgage payments and is the sole benefit of the lender.
CMHC Changes Qualifying Guidelines
CMHC has announced that they will be making changes to the minimum credit score requirement, how down payment funds are calculated, and debt service ratios.
In order to qualify for a mortgage with less than a 20% down payment (High Ratio Mortgage), you must qualify under the insurer’s guidelines as well.
After July 1st, CMHC will be changing it’s guidelines and therefor changing the guidelines a high ratio borrower must meet in order to be approved for a mortgage:
- Maximum Gross Debt Service (GDS) ratios will be lowered to 35% (from 39%)
- Maximum Total Debt Service (TDS) ratios will be lowered to 42% (from 44%)
- The minimum credit score needed to qualify will rise to 680 (from 600) for at least one household borrower
- Many non-traditional sources of down payment that “increase indebtedness” will be banned
- It has been confirmed, however, that borrowers will continue to be able to use a loan from their RRSP through the Home Buyers Plan, a home equity line of credit (HELOC) on one of their second properties, or a HELOC on a property owned by their parents if the money is gifted.
What Impact Do These Guidelines Have on Qualifying & Affordability?
Overall, the changing of the minimum credit score requirement will not affect affordability directly – but it will make it harder for buyers to qualify.
However, the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios will impact the amount of debt (mortgage) you’re allowed to take on.
GDS Definition: 39% GDS (Gross Debt Service) means the total of your monthly mortgage payment, monthly property tax portion, monthly strata fee cost (if applicable), and monthly heat cost must be less than 39% of your gross monthly income.
TDS Definition: TDS (Total Debt Service) is everything accounted for under GDS plus any other debt (credit cards, car payments, lines of credits, loans, etc.).
These ratios are put in to effect to prevent over-borrowing and buyers stretching themselves too thin in their home purchase.
Ultimately, if these amounts are tightened, then this will decrease how much of a mortgage you can qualify for and therefore decrease purchasing power & affordability. The changes in these amounts will reduce affordability for buyers roughly 10-12%.
As an example, a household earning $120,000 would currently qualify for a mortgage of around $565,000 plus insurance. With CMHC’s stricter rules, that same household would only qualify for a mortgage of approximately $502,000 plus insurance costs.
Why has CMHC Made These Changes?
Why changes are being made and whether it actually positively impacts people is always a controversial subject.
According to CMHC, they anticipate a 9-18% drop in the housing market prices over the next year. One of the reasons that they expect this decrease in value is due to the high amount of people that are currently deferring their mortgage payments due to COVID.
With payments being deferred, they feel that the risk of defaulting on mortgage payments is higher, and that lay-offs and other factors resulting from COVID-19 can contribute to a decrease in value in the housing market.
However, with housing prices not having waivered as much as anticipated during the state of emergency (with some areas even increasing in price), and default rates overall being quite low… one has to wonder, why is this really happening?
Many of the mortgage brokers I am talking to feel that the government hasn’t been able to stimulate housing supply in major markets across Canada, as demand still continues to outpace supply. One of the best ways to cool the market (atleast in recent years in Vancouver) is to call for a decrease in housing prices to create speculation and simultaneously (and temporarily) debilitate a portion of buyers to delay entering the housing market at this time.
With other insurers making headlines by not following suit, it’ll be interesting to see if CMHC’s predictions are correct. If they’re not and prices continue to rise, first-time home buyers will likely be hit the hardest. If only we had a crystal ball…
The “Good” News – The Other Insurers Don’t Seem to Agree
Keep in mind that mortgage insurance is not a sole monopoly – home-buyers with insured mortgages (less than 20% down) have options. The big 3 are: CMHC, Canada Guaranty & Genworth.
Soon after CMHC made their announcement on tightening the qualifying requirements, Canada Guaranty & Genworth made announcements that they will not be modifying their requirements and decided that they would continue with the existing qualifications to allow buyers the same affordability.
Therefore, home buyers that require that extra 10-12% in affordability can recommend to use the other insurers so that they can qualify for the same amount as prior to this announcement from CMHC.
If you’re looking to purchase a property and want a realtor that has strong negotiation skills to get you the best property for you at the best price possible, then give us a call. Start a conversation by calling 604-765-0376. Prefer text? 604-319-0200 or email [email protected]. We’re here to help.