Last week, the Canadian Mortgage and Housing Corporation (CMHC) announced that they will be adjusting some of their policies effective July 1st. The most notable change is the lowering of their maximum qualifying limit.
When most people hear the name CMHC, they think of mortgage default insurance, which is what borrowers require if they are purchasing with less than 20% down payment. However, many are unaware that there is often a mortgage insurer (such as CMHC) involved in their transaction regardless of their down payment size (when the purchase price is under $1 million). This is because mortgage lenders will bulk insure these mortgages on the back end, which can lower their cost of funds. They will then pass this savings on to the borrower in the form of a lower rate. This means that when a mortgage insurer makes a change, it does not just apply to those with less than 20% down payment, but to most mortgage transactions where the purchase price is under $1 million.
The full list of changes is as follows:
- Lowering of debt to income ratios. The maximum Gross Debt Service Ratio (GDS) will be reduced from 39% to 35%. The GDS is your property related debt (mortgage payment, property tax, heat and condo fee (if applicable), divided by your income.
- The maximum Total Debt Service Ratio (TDS) will be reduced from 44% to 42%. The TDS is the same as the GDS, but also includes your non-property related debt (credit cards, bank loans, lease payments, etc).
- The minimum credit score will increase from 600 to 680.
- Borrowed down payment will no longer be accepted.
Normally when there are mortgage rule changes, they are implemented by the Ministry of Finance. In this case however, they were implemented by CMHC.
This makes a HUGE difference.
When the Ministry of Finance makes a change, it must be implemented across the board, and all three mortgage insurers must follow suit. CMHC, Genworth, and Canada Guaranty.
Since these changes were implemented by CMHC themselves, the other mortgage insurers are not required to adapt the new policy. Even though CMHC is a crown corporation, they still have control over to their own internal guidelines, which is what was changed.
At this stage, it’s business as usual for Genworth and Canada Guaranty as far as debt to income ratios are concerned. If this change were implemented across the board, this would have reduced the amount that home buyers would qualify for by 10-12%. That would have been huge, especially for first time homebuyers, where entering the market is challenging enough as it is. As the other mortgage insurers have not adapted this change, the maximum qualifying amount will remain unchanged outside of CMHC.
Minimum Credit Score Increase
CMHC will also be raising the minimum credit score from 600 to 680. Only one of the applicants on the application will be required to have the higher score. This is a policy change that the other insurers will likely adapt. Lower credit scores (600-640) were always looked at on a case by case basis. The lower the score, the more the credit bureau would get scrutinized. If you have a credit score that is within this range, it does not automatically mean you will qualify. It depends on the utilization of your credit, and why the score is low to begin with.
Borrowed Down Payments No Longer Being Accepted
Genworth and Canada Guaranty will likely adapt this change as well. This is fairly insignificant as the vast majority of mortgage lenders did not accept borrowed down payments as it was. This is referring to borrowed down payments from credit cards, or unsecured lines of credit. The only exception is if it’s borrowed from a HELOC (Home Equity Line of Credit), which is still accepted in most cases. Borrowed down payments from friends or family have never been acceptable.
An Odd Time For Rule Tightening
We know CMHC was considering making changes, as they were previously floating around the idea of changing the minimum down payment from 5% to 10%. They have since moved forward with this announcement instead. Regardless of which changes they implemented, it’s rather unusual that they are tightening their rules at this time. We’re still in a pandemic. While it’s looking as though our economic situation will not be as bad as originally anticipated, there is still much uncertainty surrounding the economy. While our government has been introducing stimulus package after stimulus package to control the economic damage, CMHC is doing the opposite. Fortunately, the major changes are limited to them exclusively, and not the other insurers. At least, not yet.
Tune in every Thursday at 12pm for Lunch Time Q&A with Paul Meredith on Facebook!
The Paul Meredith Team will be donating $250 to local food banks for every mortgage we fund from April 30-July 31st, 2020.
With well over one million Canadians now out of work, the food banks need our help more than ever.
For this period in 2019, we closed 93 mortgages, which would have meant a donation of $23,250! We want to exceed this number this year! Regardless of whether you are purchasing, refinancing, or have a mortgage coming up for renewal, all closed mortgages closed through the Paul Meredith Team will add to the total donated.
Paul Meredith is the author of the Amazon #1 best selling book, Beat the Bank
– How to Win The Mortgage Game in Canada, and has ranked as one of the top
75 mortgage brokers in Canada since 2016. He was a finalist for Mortgage
Broker of the Year in 2018, and can be seen as the exclusive mortgage broker on
season two of TV’s Top Million Dollar Agent.”