If you are on the market to buy or sell a house, the announcement that Canada Mortgage and Housing Corporation (CMHC) has tightened their criteria for getting an insured mortgage was likely to make you feel a bit uneasy. The intent of this post will be to highlight the major changes as well as talk about how it will affect you.
What is the Canada Mortgage and Housing Corporation?
CMHC is a crown corporation that acts as Canada’s national housing agency. Its mandate is to assist Canadians in obtaining access to affordable housing. One of its many services is to provide mortgage insurance for people who are buying a house with a down payment less than 20%.
What is mortgage insurance, and who does it protect?
Mortgage insurance is placed on a mortgage when individuals purchase a property with less than 20% down. The insurance it put in place to protect the lender should the mortgage go into default for any reason. When a property goes into default, CMHC covers any losses the lender may realize as a result.
Why is CMHC making changes to their criteria now?
The economics team at CMHC has predicted that home prices will likely decrease between 9-18% over the next 12 months as a result of the Covid-19 pandemic lockdown. Therefore, the changes are being made in order to “protect first time homebuyers from potential future losses,” as was alluded to in their testimony before the House of Commons Finance Committee. Additionally, about 15% of all mortgages have currently had payments deferred and there is speculation that mortgage defaults could increase to 20% by September when the payment deferral programs run out. A mortgage is considered to be in default when payments are not being made as agreed.
What changes have been made?
Effective July 1 the following underwriting policies will come into effect:
- General debt servicing ratio (GDS) will be reduced to 35% from 39%
- GDS takes into account the cost of a home with respect to gross annual income. The mortgage payment, property taxes and cost to heat the home cannot exceed 35% of an applicant(s)’ gross annual income.
- Total debt servicing ration (TDS) will be reduced to 42% from 44%
- TDS takes into account the cost of a home and all other monthly payment obligations (reporting to the credit bureaus) with respect to gross annual income. The total monthly payments of all liabilities including plus the cost of the home cannot exceed 42% of an applicant(s)’ gross annual income.
- It is important to note that all unsecured credit facilities (credit cards, unsecured lines of credit, etc.) arbitrarily have payments calculated at 3% of the balance even if your required monthly payments are in fact lower.
- The minimum credit score for at least one applicant is increased to 680 from 600.
- It has been current common practice for individual lenders to also set required minimum credit scores which have ranged from 640 – 700 depending on product offering.
- This does not mean that all borrows must have a 680+ credit score. If a secondary applicant has a credit score of less than 680 the application will still be considered, however you can expect the mortgage application to be heavily scrutinized before being approved with the insurer.
- Non-traditional down-payment will no longer be accepted. Specifically, those down payments that increase the overall indebtedness of an individual (such as borrowing from an unsecured line of credit) will no longer be accepted.
How are these changes going to affect affordability?
Housing affordability will decrease by approximately 10% under these new guidelines. Another likely effect will be downward pressure on the housing market leading to a decrease in property values.
Will these changes affect you if you have a down payment of 20% or more?
The answer to this question is two-fold.
- If your mortgage amortization is 25 years or less, the mortgage will still need to meet insurer guidelines since lenders bulk insure mortgages that fall under this category.
- If you choose to increase your amortization to 30 years, you will have to meet lender specific guidelines as these mortgages are not insured in any way, and therefore the lender bears the entire risk of default on the mortgage.
Effect on current mortgage pre-approvals.
If you have a current pre-approval, you will have until July 1 to complete an offer and secure financing. If you are unable to secure financing prior to July 1, you will need to talk to your mortgage specialist about updating the pre-approval to be in line with the new regulations.
Other important information.
CMHC is only one of three mortgages insurance providers in Canada. Canada Guarantee and Genworth are independently owned and operated. As such, they determine their own underwriting practices. In the past, all three insurers have walked in lock-step together with respect to changes in underwriting guidelines. It remains to be seen if this will be the case with this most recent change by CMHC.
It will likely be 2021 before we see the total fallout of all the factors affecting the housing market including deferred payments, mortgages going into default after the deferral programs end, job market losses due to the pandemic lockdown and the global fallout of the oil and gas sector.
If you are interested in purchasing a home, it is now more important than ever to obtain a mortgage pre-approval prior to starting the shopping process with a realtor in order to save yourself undue stress and broken hearts if your dream property happens to be out of your reach.
If you have any questions about the changes CHMC has announced, or mortgage financing, please reach to myself or my team at On the Mark Mortgage Group.