There are many CMHC mortgage rule changes that have the potential to affect many Canadians. The Canada Mortgage and Housing Corporation (CMHC) recently announced many vital changes that could affect those currently looking for a home. The crown corporation is banning borrowed down payments. It’s also increasing its minimum required credit score and lowering its maximum debt servicing ratios.
These changes are only for insured mortgages (those putting down less than 20 per cent). We don’t know whether lenders will adopt these changes for those putting 20 percent or more down.
The intention is to reduce government and taxpayer risk and support the stability of the economic futures of Canadians. Let’s take a closer look at the CMHC mortgage rule changes and see what it means for the average homebuyer.
Borrowed Down Payments Banned
Believe it or not, but up until the mortgage rule changes announced by CMHC, Canadians could still buy a home with zero money down. That’s right; some lenders are perfectly fine with you borrowing your down payment. And the mortgage default insurers support it. (This is despite the government banning zero-down mortgages in 2008.)
Called a flexible down payment, you could buy a home using money from your credit card, line of credit, or a loan for your down payment. Extra debt that you take on factors into the debt servicing ratios. However, if you can pass the debt ratios and you’re a reliable borrower, mortgage lenders had no problem approving your mortgage application.
That was then, and this is now. CMHC is finally axing this program, which is long overdue, in my opinion. It just doesn’t make a lot of sense that you can buy a home with zero money down this day and age. If a person cannot afford the minimum down payment, he or she must reconsider buying a home.
The flex down payment program is no more. You’ll now have to come up with your down payment from your own resources. Use of a credit card is no longer an option.
This change may not affect Canadians much. The flex down payment program was unpopular. The vast majority of Canadians use their savings, investments, or a gift from parents towards their down payment.
Minimum Credit Score Increased
The minimum credit score needed for a CMHC insured mortgage is rising. You’ll now need a minimum credit score of 680 to get a CMHC insured mortgage. (If there is more than one borrower on the mortgage application, the primary borrower will need a credit score of at least 680.) That’s up from the old minimum credit score of 600 (although most lenders had a minimum credit score of 620 on insured mortgages.)
This change is likely to have a lot more of an impact than the borrowed down payment changes. A deteriorating economic situation due to COVID-19 means many Canadian households must take on more debt to get by. COVID-19 has exposed long-standing vulnerabilities in our financial markets and we must act accordingly.
The two most important factors that go into calculating your credit score are your payment history and credit utilization.
Credit Payment History
Your payment history is how good you are at making your payments on time. Even if you only make the minimum payment, as long as you make your payment on time, you’ll be golden in the eyes of lenders.
One of the major credit bureau providers, Equifax, also recently revised its credit reports. Equifax is showing more credit history than before for borrowers. With the additional credit history showing, this could lead to the credit scores of borrowers being lower. Lower credit scores plus higher credit score requirements for insured mortgages could spell trouble for prospective homeowners. You must also consider your credit utilization.
Credit utilization is just a fancy way of saying how much of your available credit you’re using. Revolving credit accounts like credit cards and lines of credit come with credit limits. When you use revolving credit, you’re building your credit history, which can help your credit score.
Using too much of your available credit can work against you. Generally speaking, lenders only want you to be using up to 50 percent of your available credit.
For example, if you had a credit card with a $5,000 credit limit, a lender would never want to see more than $2,500 (50 percent) charged on your credit card at any one time.
When you go above that 50 percent threshold, it signals to lenders that you may have difficulty making your credit payments. You may go over 50 percent of your available credit due to taking on additional debt to get because maybe your household income has been reduced due to COVID-19.
It’s expected that a lot more Canadians will be closer to being maxed out than before. The minimum credit score of 680 can hinder Canadians looking at even relatively low home prices. You can include someone as a guarantor or co-signer if you don’t meet the minimum score. It may help get your mortgage application approved.
Maximum Debt Servicing Ratios Lowered
This third and perhaps the most significant of the CMHC mortgage rule changes is that the maximum debt servicing ratios are getting lower. At first glance, it seems like a good thing. But it’s not for people looking to buy homes in pricey real estate markets like Toronto and Vancouver.
To qualify for a mortgage, mortgage lenders look at several factors, including your income, down payment, your credit score, and related to your credit score, how much debt you have. Debt servicing ratios are directly related to the last two items.
There are two debt servicing ratios lenders look at when qualifying you for a mortgage: the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio.
About the Gross Debt Service and Total Debt Service
The GDS ratio looks at the percentage of your gross monthly income to cover a property’s mortgage payments, property taxes, an amount for heat and maintenance fees (if applicable). Meanwhile, the TDS ratio looks at the same thing, except it also counts any other debt you might have outside of your mortgage.
Before the rule changes, you could have a maximum GDS ratio of 39 percent and a maximum TDS ratio of 44 percent. CMHC has announced that it will be lowering those debt ratios.
The new debt ratios that go into effect July 1, 2020, will be a GDS ratio of 35 percent and a TDS ratio of 42 percent.
An Example of How it Works
Let’s say you had a household income of $100k. Under the old rules of 39 percent GDS ratio and 44 percent TDS ratio, you’d qualify for a mortgage of $490k when making a 5 percent down payment. However, under the new rules, you’d only qualify for a mortgage of $435k with a 5 percent down payment. That’s a reduction in borrowing power of about 12 percent.
Although a two percent reduction in the TDS ratio matters, a four percent reduction in the GDS ratio is a much bigger deal. This is likely to have the most significant impact on homebuyers in big cities where home affordability is already high.
The CMHC mortgage rule changes are likely to push some homebuyers out of the market. However, there are ways to afford a home if your income isn’t enough, such as adding a co-signer.
If you’re currently looking for a property, act now to protect your interests. It’s a good idea to speak to your mortgage professional to see how the new rules impact you.