The COVID-19 pandemic has had a tremendous impact on many sectors of business across the Canadian economy - housing is definitely not an exemption. With rising concerns regarding mortgage defaults, the Canadian Housing and Mortgage Corporation (CHMC) has put forward new rules for mortgage default insurance applicants. These changes will take effect starting July 1, 2020. In this article, we will dive into how these new regulations potentially affect home buyers.
With thousands of Canadians laid off, now is a time during which some homeowners may miss a few of their mortgage payments. On the upside, tighter mortgage regulations are a step in an attempt to aid the housing market.
It should be noted that these changes apply only to CMHC, a crown corporation responsible for the Canadian housing market, that provides homeowners with mortgage default insurance. Genworth and Canada Guarantee are also providers of mortgage default insurance and they have stated that they will not be making such changes to their qualifying criteria.
Effective July 1, the following changes will apply only to new applications for mortgage insurance from CMHC:
- Maximum gross debt service (GDS) ratio is dropping from 39% to 35%
- Maximum total debt service (TDS) ratio is dropping from 44% to 42%
- Minimum credit score required will rise from 600 to 680 (for at least one borrower)
- Borrowed down payments will be disallowed (i.e. unsecured personal loans, unsecured lines of credit, and credit cards).
To provide more context for the first two changes listed above, it's worthwhile diving into what exactly GDS and TDS cover. GDS refers to the percentage of income a borrower uses to pay housing-specific costs like mortgage, property taxes, hydro/heat, and, in some cases, 50% of condo fees. Starting July 1st, CMHC will change their policies to cap these expenses at 35% of a borrowers’ income vs. the 39% ratio that was in place prior.
TDS is essentially the same as GDS, but accounts for additional expenses like credit card payments, car payments, line of credit payments, etc. CMHC will also cap these total expenses at 42% of a borrowers’ income instead of 44%.
How could these changes impact you?
Essentially CMHC is reducing the size of the mortgage that homebuyers are allowed to have as a percentage of their income. While it is difficult to predict how these changes will impact the real estate market as a whole, it will definitely have an immediate impact on homebuyers with downpayment less than 20%. These changes would also impact those with more than 20% down, if they were interested in obtaining an insured mortgage to take advantage of insurable rates. Overall, it is estimated that the impact will be about a 10% reduction in purchasing power.
For example, if a couple who had minimal debt were pre-approved by a mortgage lender for a purchase price up to $850,000 with a $60,000 down payment (a downpayment less than a 20% requires mortgage default insurance), as of July 1st, 2020 their purchase power would be reduced to just under $770,000 or an approximate decrease of 10%.
If you believe that you might be impacted by these new rules, it might be a good idea to have a conversation with a mortgage broker or agent. Feel free to message us via the live chat on Dwelly.ca and we can help answer any questions you might have.
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