I wanted to provide quick update on some of the changes CMHC is making to their lending requirements and how I think these changes will affect our market.
To secure a mortgage in Canada without default insurance a potential borrower is required to put a minimum of 20% of the purchase price down.
If they don’t have the funds to meet this requirement, they can still secure a mortgage, but the lender will require them to have default insurance. Recently, CMHC (Canada Mortgage and Housing Corporation) Canada’s largest crown corporation mortgage insurance company has tightened their requirements for insurance.
The changes in requirements are detailed below;
CMHC is changing the maximum gross debt service ratio from 39% to 35%. The gross debt service ratio limits how much of a potential borrower’s income can go towards their monthly mortgage payment.
CMHC is also changing the total debt service ratio from a maximum of 44% to 42%. Total debt service ratio is simply the total amount of debt a borrower is servicing every month (Mortgage, car loans, student loans, credit lines etc.) versus their income.
Additionally, CMHC will be tightening the credit score requirements, previously to have a mortgage insured a borrower would have to have a minimum credit score of 600, now that credit score has been raised to 680.
CMHC is also putting a stop to non-conventional sources of funds for down payments. A potential mortgagor can no longer use credit lines to top up their down payment. Monetary gifts from family members are still permitted.
According to CMHC’s president Evan Siddall these changes have been implemented in an effort to curtail “excessive demand and unsustainable house price growth.”
These changes will be ratified by CMHC on July 1st, 2020. They have the potential to decrease buying power by 10%-12% for some borrowers.
While the changes the Canadian Mortgage and Housing Corporation are making to their lending policy can certainly be considered material CMHC is not the only, “Game in town” when it comes to mortgage insurance.
Genworth is Canada’s largest private mortgage insurance company. They are not following CMHC with these policy changes and are keeping their previous lending requirements despite the somewhat bearish position CMHC has taken in recent weeks on the Canadian real-estate market as a whole.
Most lenders have no issues working with Genworth. The Royal Bank of Canada for example is just as happy to work with Genworth as they are with CMHC.
My contention is that while the changes CMHC will be implementing have recieved a lot of attention in the media they won’t effect a material change on the housing market. My experience in working with buyers as well as discussing market conditions with mortgage professionals is that the majority of borrowers are not pushing the limits.
The potential mortgagors who are pushing their borrowing power will still have the option of receiving insurance from Genworth as most lenders are just as happy to work with them as they are to work with CMHC.
I hope you found some value in my take on this issue. If you have any questions, comments or just want to talk Real estate I’m always up for a chat.
Call, text or email me anytime.
Have a fantastic day!