Canada’s biggest default insurer is about to make it harder to qualify for a mortgage. That is, if you’re buying with less than a 20% down payment.
Effective Wednesday, July 1, new mortgage rules kick in at Canada Mortgage and Housing Corporation (CMHC).
CMHC announced the changes earlier this month, claiming they’re needed in order to “protect homebuyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
What are CMHC’s new mortgage rules?
Starting Wednesday, a borrower must have a:
- Gross Debt Service (GDS) ratio of 35% or less (previously 39%)
- Total Debt Service (TDS) ratio of 42% or less (previously 44%)
- Minimum credit score of 680 (previously 600*)
- A down payment that doesn’t come from unsecured borrowing
* At least one borrower on the mortgage application must meet this requirement.
Who will be affected by the stricter rules?
The changes only apply if you need default insurance on your mortgage and you choose CMHC as your insurer.
Who needs default insurance? Anyone putting down less than 20% to purchase a home is required by law in Canada to have default insurance, if they want a mortgage with a mainstream lender. The insurance is paid by the borrower but protects the lender if the borrower doesn’t make his/her payments.
The new rules do not apply to mortgage insurance purchased from Genworth Canada and Canada Guaranty. These two private insurers announced they have no plans to adopt the rules. ‘
For a sense of how many homebuyers will be affected by the changes, consider that:
- 61% of first-time buyers purchase a home with less than 20% down, according to Mortgage Professionals Canada (MPC). And roughly 4 in 10 buyers are first-timers
- 19.5% of CMHC’s high loan-to-value originations had a Gross Debt Ratio of more than 35% (the new limit)
- 5.9% of CMHC’s originations had credit scores of less than 680
- 20% of down payment funds used by first-time buyers come from borrowed sources (MPC)
What impact will the rule changes have on buyers?
The stricter qualifying rules will effectively reduce some buyers' purchasing power by roughly 11%. That’s like the government raising the minimum stress test rate from 4.94%, where it lies today, to 6.30%. (Lenders use the stress test rate to calculate your assumed monthly payment. They then analyze your debt ratios to ensure you can afford that payment.)
But these new limits only matter if a borrower chooses CMHC. And if you can’t qualify with CMHC, why would you choose CMHC?
In practice, lenders will route borrowers to the private insurers whenever necessary, assuming borrowers still qualify under their rules.
How will CHMC’s rule changes impact the housing market?
The decision by Genworth Canada and Canada Guaranty to not adopt CMHC’s eligibility requirements “will help soften potential negative impacts on the housing/mortgage market…” analysts at National Bank Financial noted.
That’s because borrowers who may no longer qualify for CMHC default insurance still have other options. However, if they can no longer qualify for insurance from CMHC, it’s not a given that they will be approved at either of the other two mortgage insurance providers.
A certain percentage of non-CMHC-complaint homebuyers will be declined by private insurers, and thus taken out of the market, at least temporarily. Those borrowers will be forced to purchase a cheaper home, get a co-borrower, add more income or increase their down payment.
Given the private insurance option and all the dynamics currently moving the housing market — high unemployment, low supply, low interest rates, etc. — CMHC’s changes should barely impact home values and sales. The housing agency says the price impact might be only 0.5%. That doesn’t seem wildly out of the ballpark.