My Mortgage Blog

It came as a surprise when the CMHC announced even stricter mortgage qualification measures. CMHC plans to further tighten their lending guidelines, effective July 1, 2020. Thankfully for many potential homeowners, Canada’s two private insurers, Genworth and Canada Guaranty, decided not to follow suit.

Why? A need to mitigate its exposure (and taxpayer’s) to what the Crown Corporation’s CEO Evan Siddall predicts will be a drop in house values. Sidall believes values will drop by as little as 9% and as much as 18% due to COVID-19.

New CMHC Guidelines

Under CMHC’s new guidelines, which go into effect on July 1, 2020, the following will apply:

  • Maximum Gross Debt Service (GDS) ratios, or the maximum percentage of home ownership debt payments (ie. principal, interest, taxes, condo fees and heat) when compared to gross income will lower to 35% (from 39%)
  • Maximum Total Debt Service (TDS) ratios, or the maximum percentage of total personal debt payments, including the new property, relative to gross income will lower to 42% (from 44%)
  • The minimum credit score needed to qualify will rise to 680 (from 600) for at least one household borrower
  • Many non-traditional sources of down payment that "increase indebtedness” (ie. borrowed funds) will not be permitted. However, borrowers can still access their RRSPs through the Home Buyers Plan or a home equity line of credit on another property.

The Numbers

According to Mortgage Professionals Canada, 61% of first-time home buyers buy with less than 20% down. And 20% of down payment funds come from borrowed sources. This move by CMHC could cut purchasing power by up to 11%. For example, a family earning $100,000 with 5% down, with no other debt, would qualify for a $320,000 mortgage (approx.) Under the new CMHC guidelines that mortgage amount is reduced to approx. $280,000.

"COVID-19 has exposed long-standing vulnerabilities on our financial markets, and we must act now to protect the economic futures of Canadians. These actions will protect home buyers, reduce government and taxpayer risk, and support stability of housing markets while curtailing excessive demand and unsustainable house price growth,” Siddall said in a statement.

Critics of the move wondered out loud at the timing of these changes. Provinces have begun easing lockdown restrictions to kickstart the economy. They feel it is counterproductive to efforts focused on regaining confidence in the housing sector.

Paul Taylor, CEO of Mortgage Professionals Canada was quoted as saying, "… I think the timing for the introduction of these restrictions is poor, especially since the Federal government itself is pouring billions of dollars into the economy to keep it afloat.”

Canada’s Private Insurers Hold Firm

There are three insurers in Canada -- CMHC is a federal Crown Corporation and Genworth and Canada Guaranty are private sector suppliers of mortgage insurance.

After reviewing their policies and CMHC’s decision, the two private insurers decided to NOT follow CMHC’s lead. Both insurers made statements defending their current underwriting polices and are confident in their ability to manage risk.

This is positive for borrowers. For now, CMHC rule changes will be muted by Genworth and Canada Guaranty choosing not to follow their lead.

Even those with more than 20% down could be impacted. How?

Most lenders insure mortgages so that they can sell them as investments on the securitized market - they must be insured to do this. Selling them as investments gives them the capital to re-lend the funds creating "churn". This frees up capital to lend again and increase lender revenue.

The alternative would be to hold these funds on their balance sheet where there would be no "churn".

The only real difference to the borrower between less than 20% down and more, is who pays the insurance premium. With less than 20% down, the borrower pays. With more than 20% down, the insurer pays.

In Canada, federally regulated lending institutions such as banks, non-bank lenders, credit unions and trust companies, are required to insure high ratio mortgages – those with less than 20% down –against default.

Impact on Borrowers

As the economy starts its slow climb to recovery, we see positive signs across the country as sales start to increase.

When it comes to real estate, consumer confidence is key. As we continue to ease restrictions, continue to practice safe protocols, and consumers start to feel comfortable again, we will see both homebuyers and those critical home sellers become more active.

It’s hard to forecast the true impact to the market if all three insurers had decided to tighten their rules.

One thing is clear: having a competitive market for mortgage insurance greatly benefits homebuyers.