Financing | June 16th, 2020

New CMHC Rules To Effect Mortgage Applications

The Canadian Mortgage and Housing Corporation (CMHC) has recently announced changes to its coverage criteria for insured mortgages. Mortgage default insurance (CMHC insurance) is mandatory in Canada for down payments between 5% and 19.99%. Mortgage default insurance protects the lender in the event that the borrower can’t make or stop making their payments.

The changes announced by CMHC that take effect on July 1, 2020 are likely to make it more difficult for home buyers to purchase a new home with down payments of less than 20%.

Key Takeaways

The following changes will apply for all new applications that require mortgage insurance through CMHC.

  • Gross debt service (GDS) ratios must be under 35, down from 39
  • Total debt service (TDS) ratios must be under 42, down from 44
  • Borrower’s credit score must be at least 680, up from 600
  • Borrowed down payments are no longer permitted

Lenders can still choose to insure mortgages through private default insurance providers such as Canada Guaranty and Genworth Financial. These two default insurance providers have opted to not follow suit of CMHC’s changes effective July 1, 2020 leaving a question of how banks are going to respond to CMHC changes.

Impact on Buyers

The debt servicing may significantly change the mortgage amount you qualify for. For example, under today’s qualifying rules, at a 39% GDS for a household earning $100,000 per year with a 10% down payment can now afford a ~$540,000 home versus ~$602,000 previously at 35%.

The above changes to CMHC’s lending rules go into effect on July 1, 2020. More detailed information on each bullet point and key takeaways can be found below.

Debt Service Ratios

Mortgage professionals use two main ratios to decide if borrowers can afford to buy a home: Gross Debt Service (GDS) and Total Debt Service (TDS). The calculation used compares the potential borrower’s current housing debt along with other cost of living expenses.

With this new change, CMHC is requiring that borrowers have a higher income/budget to ensure they can pay their monthly mortgage payments.

To simplify what this means, potential borrowers should be keeping a closer eye on their overall household debt. To decrease your debt service ratios, you will have two choices – increase your income or lower your existing debt.

What is Gross Debt Service Ratio?

The gross debt service (GDS) ratio is a debt service measure that financial lenders use to assess the proportion of housing debt that a borrower is paying in comparison to their income. The gross debt service ratio is typically a comprehensive measure of all of a borrower’s monthly housing expenses. [source: Investopia]

What is Total Debt Service Ratio?

The total debt service ratio (TDS) is a debt service measurement that financial lenders use as a rule of thumb when determining the proportion of gross income that is already spent on housing-related and other similar payments. Lenders consider each potential borrower’s property taxes, credit card balances, and other monthly debt obligations to calculate the ratio of income to debt. [source: Investopia]

Calculate GDS / TDS

Credit Score

A minimum credit score of 680 for at least one borrower must now be met in order to qualify for a CMHC mortgage. Prior to July 1, 2020, the minimum required credit score was 600.

If the borrower does not have a credit score of 680, it could result in CMHC not approving their insured mortgage.

What is a Credit Score?

A credit score is a number ranging from 300-850 that depicts a consumer’s creditworthiness. The higher the credit score, the more attractive the borrower. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner. [source: Investopia]

Borrowed Down Payment

Under their previous rules, applicants could borrow money for their down payment through CMHC’s program, subject to certain rules. With the new changes announced, if a applicant is required to borrow a down payment, they automatically become disqualified from CMHC coverage.

James Laird says this will not be as significant a change as the other measures announced today: “Most Canadians source their down payment from their own savings and investments, along with gifts from family, and those sources remain unchanged. The change to down payment will not be as impactful as the changes to the GDS limit and credit score.” [Source: Rate Hub]

Next Steps

As the world continues to change, it is likely that we will continue to see changes that impact industries such as the housing market. It’s important to take a moment to think through how these changes will impact your personal situation. If you are planning on purchasing a new home in the next ninety days, contact your mortgage specialist/banker in order to take advantage of CMHC’s rules prior to the changes on July 1, 2020.

Whether you are buying in the near future or in a couple of years, your mortgage specialist/banker will be able assess your financial situation and come up with a personalized plan to help you get into a new home and continue on your home buying journey.

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