CMHC toughens rules for insured mortgages

Among changes is lifting of minimum credit score, use of unsecured loans

Canada Mortgage and Housing Corp. (CMHC) has raised the qualifications for insured mortgages in a move some believe will make it tougher for home buyers to get a foot on the property ladder.

The agency says the changes are designed to protect itself from financial risk and save consumers from over-indebtness.

CMHC did not, however, take the more drastic step of raising the minimum down payment from 5 per cent to 10 per cent — an idea that had been floated recently by its CEO Evan Siddall. He cited the possibility that as many as 20 per cent of homeowners could be in mortgage deferrals by the fall. If unemployment remains high, some of those mortgages could go into arrears and, ultimately, foreclosure. Under the new CMHC rules, which take effect July 1, banks will be bound to the standard 35/42 GDS (gross debt service ratio) and TDS (total debt service ratio) used to assess mortgage loan applicants. Until now, borrowers had been allowed to reach a 39/44 ratio.

The GDS measures the carrying costs of the home, including mortgage, taxes and heating, against the borrower’s pre-tax income. The TDS looks at the borrower’s overall debt, incorporating things like car payments and credit cards.

CMHC will also require at least one person on the mortgage to have a minimum credit score of 680 and it will no longer accept “non-traditional sources of down payments,” such as unsecured personal loans or unsecured lines of credit as equity for insurance purposes. Most first-time home buyers use their savings, borrow from their retirement savings or receive gifts to finance their down payments. In a CMHC statement Thursday, Siddall said the pandemic has exposed “long-standing vulnerabilities” in Canadian financial markets.

The changes to its underwriting “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,” he said.

CMHC has also suspended refinancing for multi-unit mortgage insurance except in cases where the money is being used to fund repairs or reinvest in the housing.

Mortgage expert James Laird, president of CanWise Financial and Ratehub, said the changes will diminish buying power by about 12 per cent, mostly due to the GDS changes that will make it tougher for first-time home buyers to qualify for insured loans. Typically, buyers with a credit score between 620 and 680 would be able to get a mortgage.

“It reduces the number of people who can qualify for mortgages and, of those people that qualify, it reduces the amount of money they get,” he said.

Ratehub.ca says the mortgage qualifying rate of 4.94 per cent and a GDS limit of 39 would allow a buyer with $100,000 in income and a 10 per cent down payment to purchase a home for $524,980. Under the GDS limit of 35, the same buyer could only buy a $462,860 house.

The changes suggest that

CMHC’s entire portfolio was based on the assumption that house prices will always rise, said Realosophy president John Pasalis. Typically when the economy slows down, policy-makers relax credit to fuel spending, he said.

“When you’re tightening it, it’s like their models don’t anticipate any losses because they need to scale back because they’re worried about losses,” said Pasalis. That CMHC allowed higher GDS thresholds for eight years has contributed to people taking on more debt, he said.

CMHC is forecasting a nineto 18-per cent drop in home prices with recovery not expected until the end of 2022.

On Wednesday, the Toronto Region Real Estate Board reported that GTA home prices actually rose three per cent year over year, up 4.6 per cent over April.