On June 5, 2020 The Canadian Mortgage and Housing Corporation (CMHC) announced it will be tightening its mortgage qualification rules for borrowers with less than 20% down payment. This would significantly impact homebuyers decreasing their borrowing by 10% to 12% and pushing them further away from their dream of homeownership.
These changes come into effect July 1st, 2020.
Who is CMHC?
The Canadian Mortgage and Housing Corporation CMHC is a Federal Crown Corporation that provides default insurance for home buyers with less than 20% down payment.
Any potential home buyer with less than a 20% down payment must purchase default insurance on their loan and have a minimum down payment of 5%. Mortgage default insurance protects lenders in the event a borrower ever stopped making payments and defaulted on their mortgage loan.
What are these changes in Lending Guidelines?
Effective July 1st, the following changes will apply for new applications for homeowner transactional and portfolio mortgage insurance:
- The maximum gross debt service (GDS) ratio drops from 39 to 35
- GDS is the borrowers housing cost (i.e. mortgage payment, property tax, plus a portion of condo fees) as a percentage of the borrowers’ income
- The maximum total debt service (TDS) ratio drops from 44 to 42
- TDS is the borrowers housing cost + plus their other debt payments (i.e. car loan, credit card, line of credit) as a percentage of the borrowers’ income
- The minimum credit score rises from 600 to 680 for at least one borrower
- Non-traditional sources of down payment (i.e. unsecured personal loans, unsecured line of credit, credit card) that increase indebtedness will no longer be treated as equity for insurance purposes. In other words, borrowed down payment will no longer be allowed.
- Traditional sources of down payment such as savings, RRSPs, or a non-repayable financial gift from immediate family members will still be allowed
What do these changes mean for new borrowers?
Let’s consider an example of a family with an annual household income of $100,000 purchasing a condo with a minimum 5% down payment.Using the current mortgage qualifying rate of 4.94% and GDS limit of 39, a family with an annual income of $100,000 would qualify for an approximate loan amount of $494,000.Under the new GDS limit of 35, the same household can now only qualify for an approximate loan amount of $437,000.This is a decrease of almost 12% of what a potential buyer can borrow, July 1st onwards.
Will the other insurers follow?
While CMHC is the largest provider of mortgage default insurance, there are two other private providers as well, Genworth Financial and Canada Guaranty.
Following CMHC’s announcement on June 8, Genworth Financial and Canada Guaranty announced that it won’t follow CMHC in tightening their underwriting policies related to debt service ratio limits, minimum credit scores and down payment requirements. Both providers of mortgage default insurance are holding steady despite a move by one of its main competitors to toughen mortgage lending standards.
What should you do?
If you are considering purchasing a home with less than 20% down payment, make sure to reach out to a mortgage agent such as myself to see if these changes will impact your qualification.