CMHC tightens mortgage rules in response to COVID-19
Friday Jul 10th, 2020
Canada’s biggest default insurer announced new mortgage rules that went into effect from July 1st, making it harder for homebuyers to qualify for a mortgage that is giving less than 20% down payment. According to CMHC, these new rules are needed to reduce government and taxpayer risk, to protect homebuyers and to support the stability of housing markets while curtailing the unsustainable growth of house prices and excessive demand.
CMHC announced new guidelines for calculating the stress test in February 2020, and the changes were planned to be put into action after April 6th, 2020; however, those changes were suspended in March due to the coronavirus outbreak. The mortgage stress test still remains unchanged under the new mortgage rules, which are as follows.
Change 1: Reduced debt as a gross income percentage
Buyers with reliable income and good credit scores were allowed to spend up to 39% of their gross income on housing. They could also loan as much as 44% of their gross income after including car payments, credit cards, and other loans.
According to the new mortgage rules, buyers can now only spend a maximum amount of 35% of their gross income on housing, and they can only borrow a maximum of 42% of their gross income after including other loans.
Change 2: Revised minimum credit score
Previously, at least one borrower or their guarantor were required to have at least a “fair” credit score, which is 600 according to standard guidelines, in order to qualify for an insured mortgage.
As per the new rules, the buyers will need to have a minimum credit score of 680, meaning they’ll now need to have a good credit score in order to qualify for an insured mortgage.
Change 3: Borrowed down payments eliminated
The old rule allowed homebuyers to use unsecured lines of credit, credit cards, and unsecured personal loans to make up the minimum down payment.
The new rule limits borrowers to make the down payment from their own resources, here, own resources mean;
- Liquid financial assets or against other real property
- A non-repayable financial gift from a relative
- Equity from the sale of a property
- Funds borrowed from other
- A government grant
At least one borrower on the mortgage application must meet all three of these requirements.
Who will be affected by the stricter rules?
The changes mentioned above only apply to those who choose CMHC as their insurer for getting default insurance on their mortgage. In Canada, according to the law, anyone who wants to get a mortgage from a mainstream lender but makes a down payment of less than 20% when purchasing a home needs default insurance. The borrower has to pay the insurance, but the purpose of the insurance is to protect the lender if the borrower fails to make their payments.
If you are going to get the mortgage insurance from Canada Guaranty and Genworth Canada, then these new rules do not apply to you; both of these private insurers have said that they aren’t going to adapt these rules. Let’s take a look at a few stats to see the numbers of home buyers that will be affected by these changes.
- According to Mortgage Professionals Canada (MPC), 61% of first-time homebuyers make a down payment of less than 20%.
- 5.9% of CMHC’s originations had a credit score of less than 680 (lower than the new limit).
- The Gross Debt Ratio of 19.5% high loan-to-value organization of CMHC was over 35% (more than the new limit).
- Borrowed sources make up 20% of down payment funds used by first-time buyers.
How will these new rules affect buyers?
These strict new rules will reduce the purchasing power of some buyers by 11%, in terms of the stress test; it’s like IF the government raised the minimum rate to 6.30% from the current 4.94%. As mentioned earlier, these new rules only affect you if you choose CMHC. We believe that the lenders may route borrowers to private insurers if those borrowers don’t meet the new CMHC rules but meet the lenders’ rules.
Impact of the new rules on the housing market
As mentioned earlier and Canada Guaranty and Genworth Canada are not adopting the new and strict CMHC rules, which means that the borrowers that don’t meet CMHC guidelines may still be able to get default insurance from private insurance. So we believe that the potential negative impacts of this new policy will be managed; still, the borrowers that don’t meet CMHC’s don’t automatically qualify for default insurance from private insurers. In fact, a certain amount of homebuyers that don’t meet CMHC’s rules will also get rejected by private insurers and taken out of the housing market (which we think is only temporary). Borrowers that don’t meet the guidelines will have to buy a cheaper home, find a co-borrower, increase the down payment or add more income.
Considering the factors currently moving the housing market and the option to choose a private insurer, we think that these changes won’t have a drastic effect on the housing market. According to CMHC, the price impact of the new rules will only be 0.5%, which is not relatively bad as it won’t completely disrupt the housing market.