On June 4, Canada Mortgage and Housing Corporation (CMHC) announced some changes to their underwriting criteria. For many buyers with less than 20% to put down on a purchase, the new rules will mean they will qualify for less than they did before July 1, 2020.
The CMHC website listed these adjustments:
Effective July 1, the following changes will apply for new applications for homeowner transactional and portfolio mortgage insurance:
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- Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to our standard requirements of 35/42;
- Establish minimum credit score of 680 for at least one borrower; and
- Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes.
So What Exactly is Different?
In reverse order, here is what each adjustment means in plain English:
⇒ Buyers who need CMHC insurance (ie, those with 5-19.9% down) will no longer be allowed to use any borrowed funds toward their qualifying down payment. An outright gift from a relative is still acceptable, though. So are proceeds from the sale of a property, savings, and funds borrowed against the buyer’s own assets (eg, RSP’s, other property), or a government grant, if you can get one. And the CMHC First Time Home Buyer Incentive is still in place. (We have found that mortgage brokers are less than excited about this program, generally speaking.) But borrowing from your personal line of credit or any other unsecured loan for your down payment – not allowed.
⇒The requirement for a credit score of 680 is also new. Under the rules until June 30, 2020, one buyer must have a credit score of at least 600. The new requirement is a big jump for someone whose credit has taken a hit for one reason or another. Improving a score by 80 points is not something that can usually be done within a few weeks, unless there has been a mistake that can be cleared up. The process will likely take months, perhaps years.
⇒ The adjustment to the Gross/Total debt servicing ratio requirements is going to be the most significant determining factor for most buyers looking for insured mortgages.
To calculate your Gross Debt Service ratio:
- Add all of your monthly housing-related costs (mortgage payments, property taxes, heating costs, use only 50% of condo fees in this calculation)
- Divide the total by your gross monthly income
- Multiply that sum by 100 to get your GDS ratio
Under the new rules, this number must be no more than 35%. The old rules allowed anything up to 39% to be considered.
To calculate your Total Debt Service ratio:
- Add all costs as in GDS calculations, plus all other monthly expenses (car loans, student loans, credit cards payments, etc)
- Divide the total by your gross monthly income
- Multiply that sum by 100 to get your TDS ratio
Under the new rules, this number must be no more than 42%, down from a maximum of 44%.
These new, tighter criteria are estimated to have shaved up to 11% off the purchasing power of some buyers.
Why Are They Doing This, Anyway?
CMHC has long been the market share leader in Canada’s insured mortgage market. They serve a very useful purpose in helping Canadians get into the real estate market by allowing them to obtain mortgages for amounts that banks alone would never lend. But they are a for-profit (crown) corporation, and as such, must manage perceived risk as they see fit. The press release about these latest changes included this statement:
“‘COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,’ said Evan Siddall, CMHC’s President and CEO. ‘These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.'”
CMHC seems to believe that they must protect themselves from loss due to economic effects of the current pandemic.
What Options Do Buyers Have?
There are actually alternatives available for buyers who don’t qualify under the new lending criteria through CMHC. Genworth (Now Sagen) is a private mortgage lender that is keeping their GDS/TDS required ratios the same at 39/44.
Canada Guaranty is another option.
As of Monday, June 8, neither of these mortgage insurers were planning to follow the lead of CMHC in tightening up their underwriting procedures. This means that, if you are looking for a mortgage, and CMHC refuses you, one of these two companies may still approve your file and allow you to get a mortgage.
Is Our Debt Out of Control?
To hear some people tell it, Canadian society is on the verge of collapse because of never-before-seen levels of household debt. There is no debating that we are borrowing more overall.
There is, however, some interesting perspective on trends in household debt between 1990-2019 in this report (released in February 2020) that was done by Mortgage Professionals of Canada. Read the full document here:
Annual State of the Residential Mortgage Market in Canada
Page 21 of the report includes this set of statistics that are of particular interest to home owners:
“However, the expansion of indebtedness has been matched by growth of assets: the most recent ratio of households’ debts-to assets (16.8%) is just slightly above the long-term average (16.3% for the period shown in [the chart on page 21]). During the past decade, the ratio has improved (fallen) slightly.”
This leads to the question…
What Do We Think of This?
As with any decision that involves an attempt at predicting the future, opinions vary. We believe that it’s important to be well-informed, cautious, and responsible with decisions that involve your home, your retirement planning, and your life-savings.
While it is good to keep an eye on the state of the economy and the markets in general, the bottom line is that you must plan in a way that protects your own financial interests.
No matter what the maximum amount of credit available to you, whether mortgage or otherwise, it is important that you do the math. Can you comfortably carry the payments on a loan of that size? Many buyers voluntarily choose to shop below their own maximum in order to avoid becoming house-poor.
When applying for mortgage financing, the most important consideration is almost never what a bank or mortgage insurer will lend you. Always be sure you are able to afford necessities and even the occasional luxury. Quality of life matters – a lot – when measuring how much you enjoy your home.
We are always happy to help you to explore your options and show you where you can get the most for your budget.
