The Canadian Mortgage and Housing Corporation (CMHC) has announced changes to its coverage criteria for insured mortgages. The changes could make it more difficult to qualify for a mortgage in Canada.
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%.
The main changes to CMHC lending rules
The main changes that CMHC has announced have to do with debt service ratios and credit score requirements for CMHC-insured mortgages. The new requirements are:
- Gross debt service (GDS) ratios must be under 35, down from 39
- Total debt service (TDS) ratios must be under 42, down from 44
- Borrower’s credit score must be at least 680, up from 620
- Borrowed down payments will no longer be allowed
The changes will go into effect from July 1st, 2020. The impacts of each of these points are discussed further below.
The reason for the changes
The changes should limit the growth of high-risk mortgages during the COVID-19 crisis. On May 19th, CMHC President Evan Siddall made a speech outlining grim projections for Canadian mortgages, saying up to 20% could fall into arrears due to the crisis, and that house prices could decrease between 9% and 18% over the next 12 months.
In today’s announcement, Siddall says the changes to coverage eligibility protect CMHC and Canadian taxpayers (CMHC is a Crown-owned corporation) from further losses due to the ongoing pandemic.
James Laird, co-founder of Ratehub.ca and President of CanWise Financial mortgage brokerage, said the most interesting part of the announcement was what was not changed:
“The biggest news coming out of the announcement from the CMHC is that they did not increase the minimum down payment from 5 percent to 10 percent,” James said. An increase to minimum down payments had been predicted after Siddall’s May 19th speech.
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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 today:
“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.”
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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.
The bottom line
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.