CMHC Rule Changes (Canadian Mortgage and Housing Corporation) are changes to the underwriting guidelines for insured mortgages. These rule changes will make it difficult for potential Canadian home buyers to qualify for insured mortgage loans.
It will have a significant impact on the economic future of Canadian real estate. In this article, we will discuss the reason behind these rule changes, how they would impact home buyers, and how you could avoid them.
What Are The New CMHC Rule Changes?
The major changes that the CMHC has announced pertain to debt service ratios and the minimum credit score requirements to get a CMHC mortgage insurance. The rule changes can be summarized as follows:
Home buyers won’t be allowed to use borrowed funds to make down payments.The money for down payment has to either come from own savings, sale of a property, a cash gift which doesn’t need to be paid back etc.
Any cash which increases borrowers indebtedness can not be used as a down payment for insured mortgages with CMHC.
Under the new underwriting CMHC guidelines The primary borrower or at least one of the borrowers (in case of a joint purchase) must have a credit score of at least 680. This is an increase from the previous requirement of a minimum credit score of 600.
The new GDS/TDS ratio will be lowered to 35/42. Previously it was 39/44.
- The maximum Gross Debt Service (GDS) ratio to qualify for a mortgage has now been capped at 35%. The current limitation is 39%. GDS ratio is the proportion of your income required to pay monthly housing costs of principal, interest, taxes and heat. 50% of condo fees are also included if applicable. It is calculated as:
GDS Ratio = Principal + Interest + Taxes + Heat x 100 / Gross Annual Income
- Under the new cmhc rule changes the maximum Total Debt Servicing (TDS) ratio to qualify for a high ratio mortgage has been capped at 42%, down from the previous limit of 44%. TDS ratio is simply the percentage of your income required to pay all your debts.
- It includes all the costs covered in the GDS plus debt repayments such as car payments, credit card bills, personal loans, etc. The ratio is calculated as:
TDS Ratio = Principal + Interest + Taxes + Heat + Other Debt Obligations x 100 / Gross Annual Income
Both Total Debt Servicing and Gross Debt Servicing ratios are used by lenders to calculate the maximum amount of debt a home buyer is allowed to carry.
Lower GDS and TDS ratios suggest that you are doing well financially, as you still have a large proportion of your income left after paying all housing costs and debts. The converse is usually true if you have a higher value of both these ratios.
How Does CMHC Help Home Buyers ?
For the uninitiated, CMHC is one of Canadian Government’s Crown Corporations. It acts as the country’s national housing agency with a mandate to give citizens access to affordable housing options. It allows first time home buyers own their home with minimum down payment of 5%.
Its biggest service is providing mortgage insurance to home buyers. It aims to keep loan costs affordable enough to encourage first time buyers. Despite the implementation of mortgage stress test, the contract mortgage rates tends to be the most discounted.
CMHC mortgage insurance provides a cover to approved lenders like chartered banks against potential borrower default. The lenders pass on this benefit of risk reduction to home buyers by offering low cost loans.
If you purchase a property with less than 20% down payment, then getting CMHC mortgage insurance is compulsory.
The department has become synonymous with mortgage insurance, to the extent that the term is commonly referred to as CMHC insurance in Canada. 1 out of 3 Canadians depend on one of CMHC’s services while buying or financing a house. It has enabled households to buy a house with as little as 5% down payment.
Click to Know CMHC Insurance rates.
Evan Siddall (CMHC President & CEO)
- "COVID-19 is affecting Canada’s housing market. He listed job losses and closure of businesses due to the novel Corona virus as a source of a strong negative impact on the housing market".
- "CMHC predicted a 9 to 18% drop in home prices over a period of 12 months".
- He suggested that about 20% of Canadian mortgages could well fall in arrears as a result of the corona virus crisis.
Why Were CMHC Rule Changes Implemented Amid Covid 19 Pandemic?
These new rule changes are being introduced to reduce the risks of CMHC and to protect the interests of Canadian taxpayers from further losses due to the COVID-19 pandemic.
In his own words, “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.”
How Does CMHC Rule Changes Impact Home Buyers?
The impact of the new cmhc rule changes on home buyers would be felt in multiple ways:
- The increase in minimum credit score requirement would straight away make many Canadians ineligible for a mortgage insurance. And because mortgage insurance is compulsory for properties purchased with less than 20% down payment, they simply won’t be eligible for a mortgage loan, which would extinguish the hopes of buying a house for many households
- The lowering of the threshold for the 2 debt service ratios would mean that borrowers would be required to make more room in their already stretched budgets to make mortgage payments, if they want to qualify for the mortgage insurance. This may discourage some potential home buyers.
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In what is touted to be the biggest impact of the new rules, the change in debt service ratio threshold would reduce home buyers’ purchasing power by as much as 12%.
For instance, under the existing GDS ratio cap of 39%, a family with a $100,000 annual income would qualify to buy a house valued up to $524,980 with a 10% down payment.
Under the same conditions, that family would only be able to buy a house worth $462,860 after the new rules are implemented.
That is a massive 12% reduction in purchasing power! - The restriction on using borrowed funds for making the down payment would likely have a very minimal effect on home buyers, as most of them usually rely on savings and investments for making the down payment.
Are Genworth and Canada Guaranty going to follow suit?
Following the announcement of CMHC rule changes, there has been speculation about what Canada’s other 2 mortgage insurers would do. But both Genworth MI Canada and Canada Guaranty have confirmed that they have absolutely no plans to modify their existing underwriting policies.
Genworth Canada President said that they won’t be changing the rules as the existing ones already allow them to manage their risk exposure prudently. Canada Guaranty said that the existing criteria have served them well for years and hence they don’t feel the need to change anything.
How Can Home Buyers Dodge The New CMHC Rule Changes?
Buyers can actually use the change in CMHC rules to their advantage. The rule changes would most likely reduce the demand for houses, thus reducing house prices and making houses more affordable for buyers. If buyers can manage their ratios and have a 680+ credit score, they’ll be able to purchase a house at cheaper prices.
More importantly, buyers should look to make a minimum 20% down payment on house purchase, as that would negate the requirement of a mortgage insurance. This would mean that buyers can enjoy the benefits of low property prices without worrying about meeting the criteria for mortgage insurance. You won’t need to adjust your budget to meet the debt service requirements nor would you have to wait till your credit score reaches 680.
In conclusion, we’d like to say that this move by CMHC may come as a blessing in disguise for some home buyers. As mentioned before, if you could make a minimum 20% down payment, you can now buy your dream house at a lower price!
If you are looking for mortgage assistance, get in touch with us, one of the foremost mortgage brokers in and around Mississauga. We can help solve any other queries that you may have about CMHC rule changes and would find the best mortgage loan deals for you.