Canada Mortgage and Housing Corporation Announcement – What You Need to Know

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.

Dallas Sleeman, mortgage associateMark Holtom, mortgage associate
email: dallas@onthemarkmortgages.comemail: mark@onthemarkmortgages.com
phone: 780.266.1236phone: 780.909.1904

Upgrading Your Home: Refinance Plus Improvements Mortgage Option

When it comes to mortgages and renovations it is important that you have your financing in place before you take the sledge hammer out of the garage! Lenders do not like coming into play half way through a renovation. Planning is essential to ensure you will have enough funds to cover the renovation costs.

Did you know there are mortgage products available that may help you with the costs of renovations above the 80% loan-to-value refinancing rule. The Refinance Plus Improvements Mortgage is a great way to incorporate the costs of improvements into your mortgage.

Here’s a list of typical Refinance Plus Improvements Guidelines:

1. The improvement funds above the 80% loan-to-value mark for the current as-is market value of your home will be held back by the lender until your renovations are complete.

2. Lending value is based on an Appraisal that states the As-Is Complete Value

3. You will need quotes upfront for the proposed improvements

4. You may need additional funds to pay deposits to contractors

5. Do not start demolitions before an Appraisal is done

6. Funds available are typically limited to 20% of the current appraised value up to $40,000 (ask a mortgage broker about other mortgage options if you require more funds)

7. Renovations typically will need to be complete within 90 days from the date the mortgage completes

8. You must meet the lenders credit and debt servicing requirements

Stay on Budget and on Time by Following these 5 Simple Steps:

1. Finalize the design before you start!

2. Contact Suppliers to make sure that they have the materials you have chosen in stock or that they can be delivered quickly

3. Obtain quotes from 2 or more reputable contractors

4. Apply and secure any permits that are required before your mortgage completion date

5. Give your contractor a deadline to ensure you don’t go over the allotted time to complete the improvements

Start the renovation planning by contacting your Dominion Lending Centres mortgage professional first!

 

KATHLEEN DEDILUKE

Dominion Lending Centres – Accredited Mortgage Professional
Kathleen is part of DLC Integrity Mortgage BC based in Nanaimo, BC.

Your Pay Went Up, But you Don’t Qualify for a Mortgage?!

confused-300x300I want to share with you a story. Below is the story of John, and if you ever want to own a home, you need to read his story.

John was a 25 years old. He was good with money. He went to school and he worked his butt off to support himself. John had been saving $250 every pay cheque for the past 2 years allowing him to accumulate $12,500. This was hard for John as he was barely making $15 an hour and was not left with much spending money after each payday. Six months ago, John started a new job working full time getting paid more than $25 an hour. With the increase in income, he bought a new car with monthly payments he could easily make. Financially, John was feeling confident.

John called his mortgage broker to tell him the good news. He had his 5% down payment, had his new full time job getting more than $25 an hour and was ready to put in an offer on a $250,000 condo. John was excited- he’d been saving for 2 years, he could finally move out and have his own home. Unfortunately, John’s mortgage broker informed him that even though he had the 5% down payment and full time job, he wouldn’t be able to buy a home for at least another two years!

What the heck happened?

Well, a couple things.

First, John’s credit report wasn’t strong enough and his score was too low because of unpaid parking tickets and short credit history. Second, John didn’t know about closing costs so his savings were short thousands of dollars. Third, John didn’t know about the ratios lenders look at when qualifying a potential borrower. His $450 a month car payment took away his ability to qualify for an additional $100,000. To top it all off, John wasn’t even guaranteed 40 hours a week at this new job. Due to this, John’s broker informed him that a lender will require a 2-year average income. Of course, 6 months ago John was only earning $15 an hour, giving him a 2-year average income significantly lower than what he had now.

How to avoid being like John:

Do an application with a Dominion Lending Centres mortgage broker, these are FREE. They’ll be able to tell you exactly what you can afford, exactly how much you need to have saved, and where your credit score needs to be and how to get it there. Many of you reading this are a year or two away from wanting to purchase your own home but even if you are 5 years away: call a mortgage broker, take 20 minutes, do an application, and get qualified!

Purchasing a home is one of life’s biggest and most stressful moments and you need to be prepared for it so you don’t waste time and money like John. This is my entire reason for being a mortgage broker; someone who can be an expert for others to rely on for help. Use a Dominion Lending Centres broker, find an expert, get qualified.

Ryan Oake

RYAN OAKE

Dominion Lending Centres – Accredited Mortgage Professional
Ryan is part of DLC Producers West Financial based in Langley, BC.

 

Bank of Canada, October 19, 2016 – Bank on Hold as Housing Expected to Slow

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It is no surprise to anyone that the Bank of Canada maintained its target overnight rate at 1/2 percent today, judging that the underlying trend in total CPI inflation will edge upward to 2 percent starting early next year. Temporary offsetting factors, such as the fall in commodity prices and the decline in the loonie are dissipating. Slack in the Canadian economy will continue to put downward pressure on inflation. The risks to the inflation outlook are deemed to be roughly balanced.

Consistent with private-sector economists’ expectations, the Bank is expecting a strong rebound the second half of this year as the negative effects of the oil production cuts and the wildfires conclude. Consumer spending in the second half will be boosted by the July introduction of the Child Benefit, government infrastructure spending and accommodative monetary and financial conditions. The non-resource sector in Canada is growing solidly, particularly in the service sector and business investment continues to underperform.

As widely expected, the Bank once again cut its growth forecast for the Canadian economy. The central bank has been repeatedly disappointed by the poor performance of Canadian exports, hoping that the decline in the Canadian dollar since oil prices plunged in mid-2014 would boost manufacturing exports. While recent export data are improving, the bank has revised down its growth expectation for exports in 2017 and 2018 owing to lower estimates of global demand and the “composition of US growth that appears less favourable to Canadian exports, and ongoing competitiveness challenges for Canadian firms.” The US economy is forecast to strengthen from a very weak first half reflecting strong consumer spending boosted by rising employment and strong consumer confidence. Business investment, however, will remain anemic, as evidenced not just in the US and Canada, but globally as well.

Growth this year in Canada was revised down to 1.1 percent (from 1.3 percent in July). As well, 2017 growth is now expected to be 2.0 percent (down from 2.2 percent). For 2018, the growth forecast remains at 2.1 percent. The Bank now believes the economy will reach full capacity utilization around mid-2018, significantly later than earlier expected.

HOUSING SLOWDOWN HIGHLIGHTED

The Bank attributed the downward revision to the economic outlook in large measure to the federal government’s new initiatives “to promote stability in Canada’s housing market”. The Bank of Canada reported that these measures are “likely to restrain residential investment while dampening household vulnerabilities.” 

According to today’s newly released Monetary Policy Report, the housing initiatives will dampen this year’s GDP growth by 10 basis points and by 30 basis points next year. Government sources say they expect the growth in housing resales to decline 8 percentage points in 2017 from the forecasted 6.0 percent growth pace this year. Private estimates of the negative impact of the new housing measures on overall economic growth vary, but most expect the contractionary effect to be roughly a 30-to-50 basis point reduction in growth over the next twelve months. Given that baseline potential growth is less than 2 percent, this is a very material dampener.

Many are speculating that the new federal housing initiatives open the door to BoC rate cuts next year. Clearly, Governor Poloz sees the enhanced mortgage stress tests as mitigating his concerns of overextended homebuyers–forcing all buyers to qualify at the posted mortgage rate, well above current contract rates. Nevertheless, I believe it would take a material negative shock to growth for the Bank to cut rates. That shock might come  from a larger-than-expected contraction in housing activity among other sources.

 

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.