CMHC Tightens Mortgage Insurance Rules
On Thursday, June 4, 2020 the Canadian Mortgage and Housing Corporation (CMHC) announced three major changes to its underwriting criteria for insured mortgages. The changes are meant to impose stricter lending standards in order to protect home buyers, lenders, and the insurance companies themselves. The goal with these changes is to reduce potential risks and support the stability of the housing market, while limiting excessive demand and exponential house price growth. The CMHC made the decision to tighten their default mortgage insurance rules due to bleak predictions resulting from the COVID-19 pandemic, that house prices will drop between 9 to 18 per cent within the next 12 months.
The new rules will be put into effect on July 1, 2020 and will impact all new applications for homebuyers looking to contribute less than a 20% down payment, who need to qualify for default mortgage insurance. The changes are as follows:
- The minimum credit score will rise to 680 from the current 600
- All non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes
- The maximum gross debt service (GDS) ratio will drop from 39 to 35
- The maximum total debt service (TDS) ratio will drop from 44 to 42
You might find yourself wondering what these stricter rules mean to you and how they will alter the application process for homebuyers with less than a 20% down payment. According to the new changes, homebuyers will require a credit score of at least 680, will not be able to use borrowed funds for their down payment, and will need to have a lower ratio of debt compared to their income, while also qualifying at the mortgage stress test rate. This debt takes into consideration their monthly mortgage payments also.
Of the three changes, lowered debt service ratios and increased credit score requirements will likely have the biggest impact on Canadian homebuyers. By lowering the maximum GDS and TDS ratios, the CMHC is also limiting the purchase price of the homes that many applicants can get approved for. This will make it increasingly more difficult for many Canadians to break into the GTA housing market unless they are able to invest 20% for a down payment.
These changes to the credit score rating and debt service ratio will greatly impact Canadians hoping to get a high ratio insured mortgage through CMHC. Up until now, the maximum GDS ratio (Gross Debt Service ratio) in order to have your mortgage insured with CMHC was 39%, but as of July 1st, that number will drop down to only 35%. This means that a couple who earns $100,000 a year in combined income and who have saved $50,000 for a down payment were able to qualify for a mortgage on a home worth $550,000 prior to July 1, 2020. As of July 1st, that same couple with the same $50,000 deposit will be able to qualify for default mortgage insurance from CMHC for a home worth only $495,000. That’s 10% less in purchase power that the same couple has when getting their mortgage insured through the CMHC.
Fortunately, the two other mortgage insurers, Genworth MI Canada Inc. and Canada Guaranty Mortgage Insurance Co., are still qualifying home buyers with less than a 20% down payment using the same ratios and qualification guidelines as before. They are keeping their minimum qualifying credit score at 600, and the qualifying GDS and TDS ratios at 39 and 44 respectively. So even if a buyer with less than 20% down can not qualify for an insured mortgage through CMHC, a good mortgage broker can help them qualify through either Canada Guaranty or Genworth’s high ratio insured mortgage programs. For the time being, they have not announced any plans to implement the new CMHC rules, however it is not out of the question.
It is also important to mention that the CMHC opted to leave the minimum down payment requirement unchanged rather than increasing it from 5 to 10 per cent which they previously considered increasing. Thus, motivated homebuyers will not be required to save more than previously expected for a down payment.
For homebuyers looking to buy with less than 20% down, it is a good idea to act fast before all other default mortgage insurance providers potentially follow in the CMHC’s footsteps, and before any more potential changes are adopted.
If you have less than 20% available for a down payment, now’s a great time to speak with a mortgage broker to see what price point you can qualify for! Reach out to the experienced mortgage brokers at Clover Mortgage who will work hard to help you qualify for a mortgage that works for you.
At Clover Mortgage, our mortgage specialists are dedicated to helping all types of borrowers get approved for their dream homes. Contact a Clover Mortgage broker by email at firstname.lastname@example.org or call us at 416-674-6222 to speak with a qualified mortgage broker who will gladly assist you!