Upcoming CMHC Mortgage Changes Could Reduce Buying Power
As the largest issuer of mortgage default insurance protecting lenders if a borrower cannot make their payments, they’ve adjusted the debt service ratios and credit score requirements needed to qualify for a mortgage with a down payment of less than 20%. What does this mean for aspiring home buyers?
The main changes to CMHC lending rules
The main changes around the lending requirements for CMHC-insured mortgages:
• GDS (Gross Debt Service) ratios must be under 35 – previously 39
• TDS (Total Debt Service) ratios must be under 42 – previously 44
• Credit score of the borrower must be at least 680 – previously 620
• Borrowed down payments are no longer allowed
These changes will go into effect on July 1st, 2020.
The changes to the CMHC lending rules are being implemented to limit the number of high-risk mortgages during the uncertainty of COVID-19.
Interestingly, what didn’t get changed was the previously-discussed increase of the minimum down payment requirement from 5% to 10%.
Debt Service Ratios
Debt Service Ratios help lenders determine how much you can afford to borrow by comparing your income to the amount of debt and cost of housing expenses.
To decrease your Debt Service Ratios you either need to increase your income or decrease your debt.
Credit Score Changes
Changes to Down Payments
It used to be that you could borrow money for a mortgage down payment within certain rules. As of July 1st, borrowing your down payment will disqualify you from CMHC coverage.
You can still use your savings, investments, or gifts from family as your down payment.
Impact on Home Buyers
The upcoming changes could significantly reduce buying power for buyers who are unable to save 20% for a down payment.
According to the Ratehub.ca mortgage calculator, using the current mortgage qualifying rate of 4.94% and GDS limit of 39, a family with an annual income of $100,000 and a 10% down payment would have qualified for a home valued at $524,980*.
Under the new GDS limit of 35, the same household can now only afford a home of $462,860. This is a decrease in buying power of almost 12%, all due to the change in the GDS limit.
Private Insurance Providers
CMHC is not the only issuer of mortgage default insurance, you can also go the private insurance company route because private insurers don’t have the same obligation to hold borrowers to the same requirements as CMHC.
Borrowers may still be able to take out an insured mortgage with coverage if the private insurance companies don’t also change their eligibility criteria, however, they may have a higher default premium.
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