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It Just Got Tougher to Get A Mortgage with less than 20% Down Payment

On June 4, the Canadian Mortgage and Housing Corporation (CMHC) announced that it would be tightening the criteria to get a mortgage with less than 20% down payment.

 

These changes are set to take place starting July 1, 2020 and will be applied to CMHC insured mortgages moving forward.

 

What does this mean for new home buyers? Here is a breakdown of what will be changing.

 

The maximum gross debt service (GDS) ratio drops from 39% to 35%

Gross Debt Servicing (GDS) is calculated by using THIS formula. This dropping by 4% means that the total amount of your monthly mortgage payment, interest, heat and monthly property taxes cannot exceed more than 35% of your income.

 

The maximum total debt service (TDS) ratio drops from 44% to 42%

Gross Debt Servicing (GDS) and Total Debt Servicing (TDS) are the same thing, however total debt servicing (TDS) takes into account ALL your debt, including that which falls outside of your mortgage. For example, this could be student loans, credit card debt, car loans, etc. The total monthly payment (which includes everything from the GDS) cannot exceed more than 42% of your income.

 

Here is an example:

We have Joe, who makes $80,000 per year and has no debt outside of the mortgage. Joe’s only debt would be what he would take on from owning a property. Here are the numbers associated with owning that property:

  • Annual property taxes of $3500/year
  • Monthly heating cost of $100

 

Prior to the change, and using the GDS at 39%, Joe would qualify to borrow $380,000 (a monthly payment of $2,200). Under the new guidelines and a GDS limit of 35%, Joe would now only qualify for $335,000 (a monthly payment of $1950). That means that under the new guidelines, Joe’s borrowing/purchasing power is reduced by almost 15%! That’s a significant amount when buying a home.

 

The minimum credit score rises from 600 to 680 for at least one borrower

This one is fairly self-explanatory. They are tightening up the credit score standards for borrowers to qualify, so one person who will be applying for the mortgage must have a credit score of 680 or above to qualify. This may not seem like a big change, but lately, there have been changes to how credit scores are calculated. We have seen some people who had great credit NOT qualify because of this and a movement towards people with impeccable credit (never missed payments, always paid minimum amount owing, etc.)

 

 

Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes

Non-traditional sources of down payment refer to the fact that prior to this change you could borrow the money for your down payment from credit cards, personal loans, and unsecured lines of credit. If the borrowed amount debt serviced in your total debt servicing (TDS) and the ratios were in line you were “good to go”.  As of July 1, this will no longer be allowed. As of right now, you are still able to use a secure line of credit provided that they meet the total debt servicing guidelines.

 

Now that you understand what these changes mean, the question arises…why is CMHC tightening its qualification process?

 

According to the chief economist of Dominion Lending Centres, Dr. Sherry Cooper, the reasons are due to the changes in the market in light of the COVID-19 pandemic.

 

“The economics team at CMHC has predicted that owing to the pandemic lock down, home prices will likely fall by 9% to 18% over the next 12 months. They also believe that it will take at least two years for prices to return to pre-pandemic levels. The CMHC forecast for the economy is more pessimistic than many other forecasts, particularly that of the Bank of Canada, which asserted yesterday that the outlook for the economy was better than their April forecast suggested. Moreover, CMHC acknowledges the high degree of uncertainty associated with any forecast at this time. The Crown Corporation highlights the post-shutdown job losses, business closures and the drop-in immigration that adversely affect Canadian housing.

 

They also have emphasized the 15% of existing mortgages that are now in deferral and believe there is a risk that 20% of all mortgages could be in arrears when deferrals end. Their stated justification for tightening qualification requirements is “to protect future home buyers and reduce risk“.” (source)

 

Another key point of note is that currently, this is only applying to CMHC insured mortgages, we do not know yet if other default insurers will match CMHC’s lower debt ratios, however, it is suspected that they may become more selective in their approval process.

 

At this time, we also suspect that this will have an impact on those looking to refinance that currently have a CMHC insured mortgage. We are still gaining details on this but will keep you updated as information becomes available.

 

To end on a positive note though, Dr. Sherry Cooper stated the following:

 

“…these changes are unnecessary to protect the prudence of Canada’s home lending practices. Mortgage delinquency rates are meager, and even the Bank of Canada’s forecast is for delinquencies to remain less than 1% of all outstanding mortgages. Moreover, home buyers with jobs who meet former qualifications would undoubtedly have a longer than two-year time horizon when buying their first homes. They were already qualifying at the posted rate that is more than 250 basis points above the contract rate. If anything, the pandemic recession assures that interest rates will remain very low over the next two years.” (source)

 

There are three mortgage insurance companies within Canada, CMHC, Genworth and Canada Guaranty.  We have received word today that Genworth will NOT be following CMHC with these new restrictions and we are still waiting to hear from Canada Guaranty on what they plan to do. This is good news as CMHC is not the only mortgage insurance company you can go through, so we have options!

 

One thing that you need to keep in mind; these changes ONLY impact home buyers with less than 20 per cent down—this does not impact refinances or purchases when you have a down payment of 20% or more. Frustrating we know for buyers as you are already up against what seems like a lot of hurdles. But as we mentioned above, CMHC is not the only mortgage insurance company out there. You have options and we are here to help you work through them and find the one that will work for you.

 

If you have any questions or are wondering how this directly affects you and your mortgage, please reach out to us! We are happy to answer any questions you may have and will continue to post updates about these new changes as they become available to us.

2020-06-09T02:04:16+00:00