New mortgage rules and how they affect you
As the economy slowly re-opens, there is now even more uncertainty about the housing market. Job losses, business closures and a drop in immigration is directly affecting Canada’s housing market.
Canada’s housing agency (CMHC) said that it is concerned that already high household debt levels will only increase in the aftermath of 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. To protect homebuyers and reduce risk, they are making some changes to the mortgage eligibility criteria. Effective July 1st, following changes have been made:
Change 1: Decreased max. amount of debt applicants can carry
Lenders use two key metrics to determine how much an applicant can afford to borrow. Gross Debt Service (GDS) ratio is the share of income used to cover the mortgage and other housing costs such as property taxes and the Total Debt Servicing (TDS) ratio is the share of income used to cover housing cost plus the cost of servicing other debts. The higher the number, the more income is being used to pay the debts. CMHC has lowered the GDS from 39% to 35% and TDS from 44 to 42%.
Change 2: Increased min. Credit Score required
The minimum credit score requirement will be increased from 600 to 680 for at least one borrower in the application. If a borrower does not have a high enough credit score, it could mean that they are unable to take out an insured mortgage.
Change 3: Restricting use of non-traditional sources of down payment
Applicants can no longer borrow money to use as a down payment. A financial gift from a family member is allowed if the funds are truly a gift and are non-repayable.
How do the new rules affect you?
These changes only affect you if you are required to get an insured mortgage. Mortgage insurances protect lenders from risk of borrowers defaulting on their payments and it is mandatory in Canada for loans with a down payment of less than 20%.
Mortgage insurance is available from CMHC as well as private companies such as Genworth MI Canada Inc. and Canada Guaranty Mortgage Insurance Co. The new rules only apply to CMHC and do not apply to Canada’s private mortgage insurance providers at the moment.
Changes to GDS and credit score requirement will have the greatest impact on affordability. The new changes may reduce some home buyers’ purchasing power by up to 11% according to a report from ratespy.com.
As with any changes to the mortgage application process, the best thing for you to do is understand the impact on your personal situation.