The new stricter lending standards from Canada Mortgage and Housing Corportation (CMHC) will no longer allow homebuyers to use borrowed funds for their down payment, will require a higher credit score from at least one borrower and will lower the threshold for how much debt applicants can carry compared to their income.
These changes will reduce the purchasing power of homebuyers who opt for CMHC insurance and likely leave insured mortgage applicants in pricey markets with fewer options.
CMHC’s new debt-ratio policy could lower homebuyers’ purchasing power by up to 11 per cent.
For example, someone making $60,000 a year with a five per cent down payment and no pre-existing debt would be able to afford a home with a maximum home price that is roughly 11 per cent lower than what they would have been able to buy before the new rules. These measures could discourage some prospective homebuyers from entering the market.
Summary of the changes:
- Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to our standard requirements of 35/42.
- Establish minimum credit score of 680 for at least one borrower.
- Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes.
Changes to the GDS threshold and the credit score minimum will have the greatest impact on affordability. Banning the use of borrowed funds to finance down payments will likely have a more marginal effect, as most Canadians rely on savings, investments and financial help from family for down payments.
Mortgage insurance, which protects lenders from the risk of borrowers defaulting on their payments, is mandatory in Canada for loans with a down payment of less than 20 per cent.
While the new CMHC rules do not apply to Canada's private mortgage insurers, they could adopt the new policy on a voluntary basis.
Evan Siddall, CMHC’s President and CEO is quoted as saying, “These actions 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.”
While the rules will sting for some people trying to get into the real-estate market, they could be a bonus for others. By reducing the number of buyers, the crown corporation hopes to curb demand and balance out home prices.
For more information visit the CMHC website here.
Resources from RateSpy and Global News.