CMHC's Big Announcement - And Why It Has Little Impact
On June 3rd, Canada Mortgage and Housing Corporation (CMHC) took the mortgage industry by surprise when they announced significant changes to their underwriting guidelines, effective July 1st. These will impact buyers with less than 20% down. The following week the other two mortgage default insurers in Canada, Genworth and Canada Guaranty, announced they would not be following the same tightening measures. This has taken most of the impact out of CMHC's changes, as lenders will just send files that do not fit CMHC's tighter measures to the two insurers that allow them. That said, it is still important to understand what they are and how they may impact some home buyers.
CMHC Changes To Underwriting
Starting July 1st, CMHC will implement the following changes:
- Maximum affordability ratios dropped - Maximum TDS (Total Debt Service - the share of income that goes toward paying all housing costs, including mortgage, taxes, condo fee and heat) will be dropped from 39% to 35%. The maximum GDS (Gross Debt Services - the share of income that goes towards paying all housing costs as well as any other debt commitments) will be dropped from 44% to 42%. For a strong credit buyer without debts it will drop your purchasing power by approximately 10%.
- Tougher credit qualification - at least one borrower must have a beacon score above 680 (currently 600).
- No borrowed down payments - (ex.unsecured line of credit)
You can check out their media release here:
Who Will Be Impacted?
Now that the other two insurers are not tightening rules, most borrowers will not be impacted. But there are those that do not have the option of using Canada Guaranty or Genworth that will have to meet tighter requirements. Here are some examples:
- Mobile Home Purchases - CMHC is the only insurer who offers default insurance on mobile home purchases on rented or leased land, so those buyers will need to meet the tougher requirements.
- Porting CMHC Insurance - Buyers are able to port their default insurance policies in a purchase, which is particularly beneficial if you are selling and buying after only a year or two in a property. If your first property purchase was default insured with CMHC, then in order to port it you would need to qualify for the new purchase under the tougher requirements.
- One Less Option - There are many situations where one insurer is not willing to proceed, where another will. They can decline because of a feature of the property, location of a property, condo document concerns, or something they deem risky about the buyer. In these situations, if a buyer is purchasing beyond CMHC's new affordability maximums, or their credit score does not meet the new requirements, CMHC will not be an option. For these buyers, instead of three chances for an approval, there are now two.
Cautious Lending Market
While it was a win for consumers to have Canada Guaranty and Genworth stay the course instead of following CMHC's tougher guidelines, there is still an overall shift in the lending environment. It is simply more cautious. Lenders and default insurers are making less exceptions and choosing not to approve borderline files (ex. weak credit, recent income drops, etc.). So even if you do not have to meet CMHC's new requirements, improving your credit, paying down debt, and ensuring you have a thorough pre-approval done before you go out purchasing will all help you be successful when you purchase.
Contact me if you have any questions about your mortgage and how they are impacted by these changes.