According to the CMHC, COVID-19 has exposed many cracks and vulnerabilities in the housing market and expects housing prices to decrease by 9% – 18% over the next year. In an effort to minimize the impact COVID-19 has had, the CMHC has decided to introduce lower debt service ratios, higher credit scores and down payment limitations. The CMHC believes these new changes “will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth”.
CMHC Changes To The Mortgage Rules
According to the CMHC, the following changes will be made for insured mortgages in an effort to protect home buyers and the stability of the housing market.
- Gross Debt Service (GDS) – The requirements for the GDS ratio is being limited to 35% from the previous from 39%. This debt service ratio represents the borrower’s income in comparison to their housing debt.
- Total Debt Service (TDS) – The requirements for the (TDS) ratio is also being limited to 42% from the previous 44%. This debt service ratio measures the borrower’s ability to pay their current debts and housing debts in proportion to their income.
- Credit Score – The CMHC is also increasing the minimum credit score to 680 from the previous 600. On the plus side, for couples looking to purchase a house together, only one of you is required to have the 680 credit score.
- Down Payment – The CMHC will no longer be accepting down payments that increase a borrower’s debt. As such, unconventional sources of down payment such as a line of credit, personal loan, or any other credit product won’t be treated as equity.
Interestingly, the CMHC has decided not to change the minimum down payment. Meaning the minimum down payment will not be increased from 5% to 10%.
- The CMHC has also “suspended refinancing for multi-unit mortgage insurances except when the funds are used for repairs or reinvestment in housing”.
What Do These Changes Mean For Borrowers
Debt Service Ratio Changes
The GDS and TDS are some of the main factors lenders use to determine your ability to repay debt. These debt service ratios basically look at the percentage of your income that will be used to pay your mortgage, property taxes, and other debts. A high ratio means a significant part of your income will be used to pay off these debts, leaving you little flexibility for other expenses.
The limitations on the GDS and TDS ratio is expected to reduce the borrower’s ability to afford a home by approximately 12%. An article by CBC explains that with a GDS cap of 39%, a person with an annual income of $100,000 and a down payment of 10% would qualify for a home valued at up to $524,980. On the other hand, the new GDS ratio of 35% would allow that person to only qualify for a home worth $462,860.
Your credit score is one of the first factors a lender will look at when determining your eligibility as a borrower. The higher your credit score, the more reliable you look to the lender. As you can imagine, a higher credit score requirement will prevent a number of borrowers from being approved for an insured mortgage. Previously eligible borrowers with a credit score between 600 and 680 will have to put their dreams of owning a home on hold until they’ve improved their credit score.
Down Payment Changes
When you buy a home, you have to put a down payment of 5% to 20%. Most Canadians use their savings or investments to fund their down payments, so the restrictions on the down payment are expected to make borrowing harder for risky borrowers. In particular, borrowers who use CMHC’s default mortgage insurance by putting a down payment of less than 20 percent, as mentioned by the CBC.
Don’t want to pay CMHC insurance? Check out how to avoid CMHC fees.
Future Of The Mortgage Industry
COVID-19 has impacted many parts of the economy, including the housing market. According to a report by the CIBC, the economy is expected to experience volatile growth until a vaccine is found. The risk of a second wave and reappearance of social distancing rules is expected to increase this volatility.
The housing market is expected to follow this trajectory until the vaccine is introduced as well. According to the report, CIBC expects a recovery by 2021 but, believes demand will be weaker due to low investment activity and a poor labour market. Moreover, prices are expected to be 5% – 10% lower than what was seen last year, especially in the high-rise market segment.
Overall, the CIBC expects the post-vaccine economy to recover into recessionary conditions. Meaning, the damage endured by the economy which resulted in unemployment rising from 5.5% to 13% is expected to last a long time. The unemployment rate is expected to lower to 8% in 2021 rather than the normal 5.5%, which is expected in a recessionary economic environment.