Canadian Mortgage and Housing Corporation Changes
The Canadian Mortgage and Housing Corporation (CMHC) is changing the coverage criteria for insured mortgages for some Canadian home buyers as a response to COVID-19. The current global pandemic has outlined a variety of financial insecurities of many countries, including Canada. Among these insecurities are the housing market and current mortgage structures. The new rules we will outline in this overview will be effective July 1st, 2020 on wards.
The main changes we will see to the CMHC’s lending rules:
- 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 620
- Borrowed down payments will no longer be allowed (Source)
What does this mean to potential home buyers looking into getting into the housing market?
The changes outlined above will directly affect those looking at buying property with less than a 20% down payment. Home buyers in this category are defined as riskier borrowers, because of the lower initial payment riskier borrowers will be required to have mortgage default insurance. We will look at the main changes to the CMHC’s lending rules now and what they mean.
GDS and TDS
Home buyers will have their GDS ratios looked at and buyers will be limited to spending up to 35% of their gross income on housing. Under the old rules this number was 39%. This will include the mortgage, property tax, heating, and half of condo fees. This ties into the second point, where the TDS ratio must be under 42%, down from 44%. Meaning that total debt, including other loans (car loans, student loans, etc.) and mortgage can be a maximum of 42% of a person’s income.
Looking into the credit score now. A new minimum has been set for the credit score of someone looking at getting a mortgage under the new rules. The minimum is now 680, which falls under a “good” credit score. Rather than the 620 it was prior, which fell under the “fair” credit score category. If there are multiple home buyers only one must have the minimum score of 680.
The last change we will see is in the type of down payments that will be acceptable. “Borrowed down payments” will no longer be acceptable. Meaning that using unsecured loans, line of credits or even credit cards will not be a proper down payment. Borrowers now must secure a down payment through savings, non-repayable financial gifts or government grants. One thing that did not change was the minimum percentage of 5% down payment for first time home buyers.
Overall, the changes outlined above will reduce the overall borrowing capacity for certain home buyers. But these changes are set forth to protect the economic future of Canada’s financial market, Canadian taxpayers, and those needing mortgages.
“The changes should limit the growth of high-risk mortgages during the COVID-19 crisis. On May 19th, CMHC President Evan Siddall made a speech outlining grim projections for Canadian mortgages, saying up to 20% could fall into arrears due to the crisis, and that house prices could decrease between 9% and 18% over the next 12 months.” (Source)
All these changes to the Canadian Mortgage and Housing Corporation are set to better protect the country and housing market as a whole, and can be a bit confusing for those not in the business. We are here to be a support system and source of knowledge to empower home buyers in every walk of life to make financial decisions that best fits their needs. Please reach out if you have any questions.
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