Yesterday afternoon, The Canadian Mortgage and Housing Corporation, better known as CMHC, announced changes to its mortgage insurance underwriting and acceptance criteria. These changes take effect on July 1, 2020 and will impact those applying for mortgage financing. If you want to buy a home with a down payment of less than 20 per cent, you’ll need mortgage loan insurance so being aware of this now can certainly help you.
The following changes will apply for new applications for homeowners requiring CMHC mortgage insurance:
- The maximum gross debt service (GDS) ratio drops from 39% to 35%.
- The gross debt service ratio is a measurement used to assess the proportion of housing debt that a borrower is paying in comparison to their income. This will include things like your mortgage payment, property taxes, property association dues, and utilities. So under the old rules, someone making $100,000 per year with no other debts would be able to allocate up to $35,000/year ($2,916/mpnth) toward their GDS. This means they would qualify for a mortgage amount of up to $487,000 assuming taxes are about $4,000/year. Under the new rules, that amount drops down to a mortgage amount of about $429,000.
- The maximum total debt service (TDS) ratio drops from 44% to 42%.
- The total debt service ratio is a measurement that determines the proportion of an applicant’s gross income that is spent on any housing-related payments plus all other obligations (payments on credit cards, personal loans, automobile leases, and other similar debt payments). So using our previous example, under the old rules, someone could carry up to $44,000/year ($3,666/month) in total monthly payments, and under the new rules it drops to $42,000/year ($3,500/month). It’s important to understand the difference between the two because if someone is carrying large monthly payments, the mortgage amount you can qualify for will be reduced. It’s also important to note that this reduces the “Maximum” amount a lender will allow someone to borrow. If a homebuyer is not planning to borrow near the ceiling of a lender’s guidelines, this won’t have any impact. But if a homebuyer was already looking to borrow near that ceiling of 44%, they will want to have another look at the homes currently on the market to see if anything catches their eye before the new rules are officially implemented.
- The minimum credit score rises from 600 to 680 for at least one borrower.
- A credit score is a three-digit number, typically between 300 and 900 and is calculated using the information in the borrower’s credit report (including payment history; the amount of debt they have; and the length of their credit history). It is designed to represent a person’s overall credit risk, or the likelihood they will pay the debt back on time. Lenders, creditors, and other financial companies will use this information when determining if a borrower’s application can be approved.
- Non-traditional sources of downpayment that increase indebtedness will no longer be treated as equity for insurance purposes.
- Some lenders would still allow a borrower to apply for a mortgage without a down payment of 5 per cent provided they could obtain it from a credit card, personal line of credit, or loan. The borrower would need to qualify for the mortgage by demonstrating that they could afford both the housing costs and the payment of the funds being borrowed for the down payment using standard debt service guidelines.
It is important to note that this is a CMHC announcement, and as the release states: “These decisions are within CMHC’s authorities under the National Housing Act.” This is not a directive from the Ministry of Finance. As such, as Canada’s private mortgage insurers, Genworth’s and Canada Guaranty’s criteria which also exist to aide home buyers when purchasing a home with a down payment of less than 20 per cent, is not directly affected. Early indications seem to suggest that the private insurers will not follow in lockstep with these changes, but each are currently determining their specific response. If the two private insurers decide not to follow CMHC’s mandate, we should end up seeing healthy completion in the mortgage space. More details are expected early next week, and we anticipate some differentiation in risk appetites will create additional competition and a shift in market share over time.
Furthermore, let’s remember that the Department of Finance Canada made plans to make changes to the stress test which has been temporarily postponed, so we all will just have to wait and see if it’s implemented later this year. If they do proceed with the stress test changes, announced by Minister Morneau back in February, borrowers can expect the ceiling on lending limits to be very tight between the old rules and the new. In the example above, the maximum purchase price ends up being about $450,000 if the Federal Government does proceed in implementing the announced changes from earlier this year.
As a result of the mortgage guidelines being changed for Canadians, there may also impact those that have been already pre-approved for a mortgage and are currently in the midst of the home buying process. With only the remainder of the month left before the new underwriting criteria takes effect we highly recommend contacting your Alberta Mortgage Broker to see if the new rules will limit your options since initial projections indicate your maximum purchase price could be 10 per cent lower.
Benchmark Mortgages Inc. is an Edmonton brokerage designed to establish meaningful long-term relationships with clients and help them achieve financial freedom faster with diverse and customized mortgage options. The term “benchmark” originates from the chiseled horizontal marks that surveyors made in stone structures as an established point of reference. By definition, it is a mark that serves as a standard by which others may be judged or measured.
About Mortgage Professionals Canada
Benchmark is an active member of Mortgage Professionals Canada, a non-profit, national mortgage industry association representing 11,500 individuals and 1,000 companies, including mortgage brokerages, lenders, insurers, and industry service providers. Our members make up the largest and most respected network of mortgage professionals in the country whose interests we represent to government, regulators, media, and consumers.
The mortgage broker channel originates more than 35% of all mortgages in Canada and 55% for first-time buyers, representing approximately $80 billion dollars in annual economic activity. With this diverse and strong membership, we are uniquely positioned to speak to issues impacting all aspects of the mortgage origination process.
The mortgage broker channel is a critical and valuable profession. It creates possibility, fuels the economy and provides Canadians with choice when making the most important financial decisions of their lives.