Published: June 6, 2020 • Last updated: April 10, 2021 at 9:14 am
With A Shell-Shocked COVID-19 Economy As Backdrop, CMHC Moves to Tighten Lending Standards For Insured Mortgages
On Thursday, June 4, CMHC moved to reduce the risk of increasing mortgage defaults in Canada, to contain likely fallout from the COVID-19 pandemic and to make it harder to qualify for a CMHC-insured mortgage. (Read the press release here.)
Update June 8, 2020. Genworth Canada and Canada Guaranty officially announced they do NOT plan to implement the same rules as CMHC. This is important as it means borrowers still have the ability to qualify under the current rules with another mortgage insurer. This takes pressure off buyers to make a move before July 01, 2020.
It is unusual to see such divisive differences in core underwriting policies between the three mortgage insurers. Makes you wonder how long this will last, or does this signal a pending shift in the role CMHC plays in the Canadian Real Estate Industry going forward.
Each insurer has niche things they do differently from their competitors, and this is actually far better for consumers than a pure oligopoly. (Where the products and services seem interchangeable – like buying gas for your car)
CMHC’s new rules for mortgage qualification when you purchase a home are to include 3 significant changes:
You Cannot Borrow Any Part of Your Down Payment
If your mortgage is going to be insured by CMHC, then you may not tap into loans, credit cards or lines of credit when putting together your down payment. This will have minimal impact on the market as very few buyers tap into these programs currently.
Minimum Credit Score to Qualify For CMHC Mortgage Insurance Will Rise From 600 to 680
High ratio mortgages where the down payment is less than 20% of the purchase price are required to have mortgage insurance. Most often, homebuyers who are qualifying for a mortgage between the minimum of 5% up to 20% down are first time buyers who haven’t built sizable equity in a prior home purchase.
The implications for the market are that it will become more difficult for first time buyers to enter the market, and more than ever, would be home buyers need to pay attention to their credit management skills and maintain good credit hygiene. Sloppy repayment of loans and high credit card balances, both of which have a larger weight in your credit scores with recent changes to scoring algorithms used by credit reporting agencies, are likely to put your credit score into the danger zone, and may disqualify you from qualifying for a mortgage.
The new CMHC rules coincide with new scoring algorithms coming into effect from Equifax Canada, and following the turmoil caused by COVID-19 on employment, incomes, large-scale payment deferrals and increased debt loads for consumers, we have a perfect storm forming that will impact not just those on the margins, but people who would have easily qualified for larger mortgages at the best rates just a couple of months ago.
Borrowing Power Will Decrease From 9% to 11%
All mortgage lenders currently adhere to lending guidelines stating no more than 39% of your gross income can be required to pay your mortgage payment, property taxes, heating and half your condo maintenance fees. This number is known as your Gross Debt Service Ratio.
Effective July 01, that percentage will drop to 35%.
Putting dollars to the percentages we will see roughly the following:
New CMHC Rules Impact on Amount Buyers Can Borrow
|After July 1, 2020|| |
|After July 1, 2020|| |
Canadian Home Prices Will Fall With New Tougher CMHC Mortgage Qualification Rules
So if you qualified to buy a $600,000 condo today, you will only qualify for $530,000 next month.
And if you qualified to buy a $500,000 condo today, you will only qualify for $445,000 next month.
This means fewer buyers at the low end of the market – traditionally First Time Buyers – and that will ultimately impact the whole market, suppressing resales and ‘move-up’ buyers. So, if the housing market was healthy, why introduce this change?
Background Context – Why Are They Doing This?
CMHC has been increasingly worried over the past few months about the size of impact that the COVID-19 pandemic was going to have on the Canadian housing market, and that housing prices were headed for a cliff. Their economists, and those at the Bank of Canada have been developing models that predict increasing mortgage defaults, lower demand for housing (based on lost jobs and lost income, and fewer foreign buyers), and therefore a significant drop in prices.
This would hurt everyone, but it could really hurt those with the smallest amounts of equity in their homes, so CMHC’s stated goal is to protect buyers from a getting in over their heads if the market heads down. So, how is this reflected in the new rules?
A few weeks ago, CMHC predicted Canadian real estate prices will decrease 9% to 18% over the next twelve months. If that prediction were to come true, a large number of first time buyers would owe more on their mortgage than their home is worth. For example, if prices were to fall by 10%, anyone whose downpayment was smaller than 10% would be left with no equity, and owe more than the value of their house (their mortgage would be ‘underwater’).
The idea behind this rule change is to make it harder for those people to qualify in the first place, and apply some immediate downward pressure on price increases.
According to Evan Siddall, CMHC’s President and CEO, “COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians. 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.”
Translation: CMHC/Siddall believes home prices have gotten too high, and with a economy that no one can accurately predict post-COVID-19, he wants to protect home buyers by not allowing them to borrow too much money and by slowing down the rate of growth of housing prices.
- CMHC is one of three mortgage default insurers in Canada. As a Crown Corporation, they tend to lead policy guidelines for the country. We do not know yet if the private insurers Genworth and Canada Guaranty will follow suit – typically they do fall in line. But CMHC’s new policies were not an industry-wide mandate by the Department of Finance.
- Update June 8, 2020. Genworth Canada and Canada Guaranty officially announced they do NOT plan to implement the same rules as CMHC. This is important as it means borrowers still have the ability to qualify under the current rules with another mortgage insurer. This takes pressure off buyers to make a move before July 01, 2020.
- These rules apply to anyone wanting to qualify for an insured mortgage – even people with large down payments. So not just high ratio purchases.
- These rule changes affect purchases under one million dollars. You cannot have an insured mortgage if your property costs more.
- Insured mortgage rates are always the lowest. To qualify for these rates you must have sufficient income and high enough credit to stand up to a Gross Debt Service Ratio of 35%; Total Debt Service Ratio of 42%, and a credit score of at least 680. And a 25 year amortization period.
- These rule changes do not affect refinances – they are already uninsurable.
Our Prediction: How This Will Impact the Mortgage Market and Home Buyer Behaviour?
There have been rumblings for weeks that changes were coming, ever since CMHC President and CEO Evan Siddall forecasted a decrease in Canadian real estate prices. Many people were skeptical about this at first, but Thursday’s announcement may actually contribute towards the predicted decline in home prices, as affordability for high ratio purchasers is about to take a beating.
In fact, this change is equivalent to increasing the mortgage stress test rate from 4.94% all the way up to 6.2% or so.
Other cynics have pointed out this is also the equivalent of raising the minimum down payment requirement to at least ten percent, maybe more!
There will likely be a flurry of buying activity in the month of June, as many buyers accelerate their searches to qualify under the current rules.
Once July comes, the pendulum may swing the other way. Fewer qualified buyers may result in dropping prices at the low end of the market. First time buyers are the lifeblood of any healthy real estate market – restricting their point of entry might choke the whole market eventually.
- These changes are a big deal. Fewer people will qualify for a mortgage, and if they do, the maximum they can borrow will be around 10% or more less than it is right now.
- Your credit score and keeping good credit hygiene is more important than ever if you want to buy a home, especially if you need mortgage insurance.
- All predictions are fraught with risk. Although we believe the impact of these changes will mean lower prices looking ahead, I should hesitate to make outright predictions, because the markets often defy logic. Just look how strong equity markets have been the past two months. And look how sales levels are up in Toronto and Vancouver housing during the month of May. Multi offers made a comeback. So who knows.
One thing is clear, there will be change.
How We Can Help You
If you want to know how much mortgage you qualify for now and how much you will qualify for after July 01, please ask – we will provide you these numbers.
If you are worried about your personal credit score, please reach out. We are recognized as industry leading experts in credit management and helping to improve credit scores by working with credit agencies to rapidly remove mistakes from your credit report.
- Good Credit Hygiene Saves Over $100K On Typical Mortgage
- Reaction to CMHC’s Restrictions on Insured Mortgages
- Why Is My Mortgage Application Declined?
- High Ratio Mortgages Explained
- Why You Need A Down Payment Strategy
- What Does Mortgage Stress Test Mean?
- How To Bypass Canada’s Mortgage Stress Test When It Gives a False Positive
One of Toronto/GTA's Most Trusted and Knowledgable Mortgage Agents
Ross Taylor is recognized by his peers as one of Canada's pre-eminent difficult mortgage specialists. His ASKROSS blog and column in Canadian Mortgage Trends are focused on the intersection between mortgage financing and personal credit.
With unique dual certification as a licensed credit counselor and mortgage agent, Ross's insights are valued by mortgage professionals and homebuyers alike.
If you have questions about anything financial or mortgage-related, please contact [email protected]. Ross answers everyone personally.
For more information, visit About Ross Taylor.