Do the New CMHC Regulations Make Mortgage Applications Tougher?

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On June 4, 2020, the Canadian Mortgage and Housing Corporation (CMHC) announced changes to the eligibility rules for mortgage insurance, in the agency’s latest response to the COVID-19 pandemic. These rules took effect on July 1. 

CMHC put these revised rules in place because of the principal belief that COVID-19 has exposed vulnerabilities in Canada’s financial markets with the hopes that these rules will reducing demand and put a damper on “unsustainable housing price growth.” This means fewer buyers at the low end of the market – traditionally First Time Buyers – and that will ultimately impact the whole market, suppressing resales and making it tougher to ‘move-up’ buyers. 

What Are The New Rules For CMHC Mortgages In Canada?

The new rules lower the amount of debt an applicant for an insured mortgage can carry, set a higher credit score to qualify for Canadian Mortgage and Housing (CMHC) insurance, and will require a homebuyer to use their own, and not borrowed, funds for their down payment.

Change 1: Less debt as a percentage of gross income

Old rule: Buyers with good credit scores and reliable income could spend up to 39% of their gross income on housing (including their mortgage, property tax, heating bill and half of condo fees); and could borrow up to 44% of gross income once credit card, car payments and other loans are included.  

New rule: All buyers will be limited to spending up to 35% of their gross income on housing, and can only borrow up to 42% of gross income once other loans are included. 

Change 2: New minimum credit score established

Old rule: Under the old rules, in order to qualify for an insured mortgage at least one borrower (or their guarantor) needed a minimum credit score of 600, which is only “fair” credit according to standard guidelines. 

New rule: The new rules raise the minimum to 680—meaning buyers will need a “good” credit score. 

Change 3: No more borrowed down payments

Old rule: In order to make up the minimum down payment, a homebuyer could use unsecured personal loans, unsecured lines of credit and even credit cards. The minimum down payment is 5% for houses valued up to $500,000, and 10% of the amount over $500,000, up to $1 million. 

New rule: Borrowers must provide the down payment “from their own resources,” CMHC says. These can include savings; equity from the sale of a property; a non-repayable financial gift from a relative; funds borrowed from other, liquid financial assets or against other real property; or a government grant.

The “mortgage stress test” will remain unchanged. The stress test requires lenders to confirm that a borrower can still make their monthly mortgage payment even if interest rates rise. As an aside, we calculate this change is equivalent to increasing the mortgage stress test rate from 4.94% all the way up to 6.2% or so.

Why Is the CMHC Doing This?

CMHC has been increasingly worried over the past few months about the size of impact that the COVID-19 pandemic was going to have on the Canadian housing market, and that housing prices were headed for a cliff. Their economists, and those at the Bank of Canada have been developing models that predict increasing mortgage defaults, lower demand for housing (based on lost jobs and lost income, and fewer foreign buyers), and therefore a significant drop in prices.

This would hurt everyone, but it could really hurt those with the smallest amounts of equity in their homes, so CMHC’s stated goal is to protect buyers from a getting in over their heads if the market heads down. So, how is this reflected in the new rules?

The idea behind this rule change is to make it harder for those people to qualify in the first place, and apply some immediate downward pressure on price increases.

In short, the CMHC believes home prices have gotten too high, and with a economy that no one can accurately predict post-COVID-19, he wants to protect home buyers by not allowing them to borrow too much money and by slowing down the rate of growth of housing prices.

Are Mortgages Going To Be Harder To Get?

CIBC estimates the change in mortgage insurance rules will mean about 5% of homebuyers will no longer be able to qualify for a mortgage. For those who can, it will mean a reduction in their buying power.

For those that do qualify the maximum they can borrow will be around 10% or more less than it is right now. A household earning $120,000 would currently qualify for a mortgage of around $565,000 plus insurance. With stricter CMHC rules, that same household would only qualify for a mortgage of approximately $502,000 plus insurance costs.

While good credit has always been an important facet of one’s financial health, is has become more important than ever if you want to buy a home, especially if you need mortgage insurance.

How Much Do I Need To Put Down To Avoid CMHC?

The only real way to completely avoid CMHC fees is to come up with the full 20% down payment. If you’re a bit short, there are ways you can try to put some money together: 

  • Use your RRSPs (remembering that there might be a tax penalty for early withdrawal. 
  • If you put a bunch towards your RRSP, use your income tax refund. 
  • Use a private mortgage lender. They don’t charge CMHC fees but their interest rates and other bank fees will be higher. 

Your goal when you first started saving for a home was to buy one. Whether or not you had a specific timeline in mind, paying the extra CMHC fees allows you to get to your goal that much faster, even though it’s at a cost. That’s not necessarily a bad thing if you take the time to weigh the options.

Keep this in mind: 20% on a $500,000 home is $100,000. 10% is half of that and should theoretically take you half the time to save. If the tradeoff is paying a CMHC fee of 1.75%, which translates into $296/month (based on 10% down and a 2.79% interest rate), is waiting the extra time to save double the money worth it? 

Are there Alternatives to CMHC?

Genworth Canada and Canada Guaranty are the two largest, non-CMHC, independent mortgage insurance providers in Canada. Following CMHC’s June 4th announcement both insurers confirmed they will not be changing their underwriting policies, essentially muting CMHCs policy as alternative insurance is available to “higher-risk” borrowers.

Genworth Canada and Canada Guaranty stance is a positive for borrowers who will continue to have some options in the markets and should help soften potential negative impacts to the housing/mortgage market for those individuals unable to meet CMHC’s stricter qualification standards. 

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