The CMHC has announced new mortgage rules that will take effect on July 1, 2020. These changes tighten CMHC requirements and are aimed at discouraging higher-risk borrowers from taking on a mortgage they can’t afford.
What is a high-risk borrower? A homebuyer with less than 20% home down payment.
CMHC is the largest issuer of mortgage default insurance, which protects lenders if a borrower cannot make their payments. Mortgage default insurance (often called CMHC insurance) is required on any mortgages with a down payment of less than 20%.
The changes are likely to make it harder for aspiring home buyers with down payments of less than 20%.
New Mortgage Rules as of July 1st
- Homebuyers will need at least a credit score of 680. This is 80 points up from the previous requirement of 600. If a couple is buying a home, one of the applicants must have a credit score of at least 680.
- The maximum gross debt ratio (GDS) is limited to 35% (down from 39%) and the maximum total debt service ratio (TDS) is now 42% (down from 44%).
Effectively, you will need to show that a smaller percentage of your income is required to pay off your debts.
- Borrowed funds will no longer count towards your down payment or count as equity when considerations are being made for your mortgage default insurance.
While these changes will definitely impact some homebuyers, it is not as bad as it sounds. There were initial fears that the minimum down payment amount was going to be raised from 5% to 10%.
To further manage the risk to its insurance business, and ultimately taxpayers, during this uncertain time, CMHC said it’s also suspending refinancing for multi-unit mortgage insurance. However, there is an exception: if the funds are used for repairs or reinvestment in housing. CMHC says consultations have already begun on the repositioning of its multi-unit mortgage insurance products.
Debt service ratio changes
Debt service ratios are calculations lenders use to determine how much an applicant can afford to borrow. The calculation compares an applicant’s income to the amount they are paying to service their current debt, along with some other cost of living expenses. The higher the number, the more income is being used to pay your debts.
By lowering the threshold for the two debt service ratios, borrowers will need to have more room in their budget to make their mortgage payments in order to qualify for CMHC coverage on their mortgage.
To decrease your debt service ratios, you must either increase your income or pay off your existing debts.
Credit score changes
The minimum 680 credit score requirement simply means that for a borrower to qualify for CMHC coverage on an insured mortgage, they must have a credit score of at least 680, which is higher than the previous score of 620.
If a borrower does not have a high enough credit score, it could mean that they are unable to take out an insured mortgage.
Changes to down payments
Previously, mortgage applicants were able to borrow money for a mortgage down payment, subject to certain rules. Under today’s changes, doing so will disqualify borrowers from CMHC coverage.
James Laird says this will not be as significant a change as the other measures announced:
“Most Canadians source their down payment from their own savings and investments, along with gifts from family, and those sources remain unchanged. The change to down payment will not be as impactful as the changes to the GDS limit and credit score.”
New Mortgage Rules: The Impact on consumers
The upshot for would-be borrowers is that they will now need a higher credit rating and lower debt service ratios to qualify for a high-ratio mortgage (ie, a mortgage with a less than 20% down payment). Consumers can avoid this by having a down payment of more than 20%, as these are not dependent on eligibility for CMHC coverage.
However, if an applicant is unable to save a 20% down payment, today’s changes could significantly reduce buying power. According to the Ratehub.ca mortgage calculator, using the current mortgage qualifying rate of 4.94% and GDS limit of 39, a family with an annual income of $100,000 and a 10% down payment would have qualified for a home valued at $524,980*.
Under the new GDS limit of 35, the same household can now only afford a home of $462,860. This is a decrease in buying power of almost 12%, all due to the change in the GDS limit.
Private Insurance Providers
It’s worth noting that CMHC is not the only issuer of mortgage default insurance, and private insurance companies do offer it. Private insurers are under no obligation to hold borrowers to the same requirements as CMHC.
If other providers do not change their eligibility criteria, borrowers may still be able to take out insured mortgages with coverage provided by a private provider. It is possible that the mortgage default premiums from a private provider may be higher than they would be from CMHC.
New Mortgage Rules & the Importance of a Mortgage Broker
As with any changes to the mortgage application process, the best thing for you to do is understand the impact on your personal situation. For assistance, the best person to speak to is a mortgage professional, such as a mortgage broker. Brokers are independent experts and can assess your situation to give you personalized, up to date advice.
If you want to understand more about your spending power, fill out the form below. We’ll be in touch to chat with you about your pre-approval, and can even put you in touch with a highly recommended mortgage broker so you can understand more about the new rules, and how they can impact you.