CMHC Tightens Mortgage Rules – Can you still buy a house after July 1st?
The short answer is “yes”, you can still buy a house after July 1st if you qualify under the new mortgage rules.
The good news is if you don’t have a lot of debt, have at least 20% down payment and a reportable income of over $100,000 you are probably going to be ok. For those who do not fall into this category, it is important to understand how these new mortgage rules could affect you.
If you’ve been looking to buy a house and need a mortgage, as of July 1st, 2020, CMHC will be implementing new, strict guidelines which will have a negative impact on new home buyers, as a result of the 2020 economic downturn due to the Covid-19 pandemic.
These changes will make it harder for new home buyers, with down payments of less than 20%, to get a mortgage.
Here is an explanation of the 4 main changes to the mortgage qualification rules and what they mean. Primarily, the changes are with your credit score and your debt service ratios.
- At least one of the borrowers has to now have a minimum credit score of 680, as opposed to the previous score of 600.
- The maximum total Gross Debt Servicing ratio (GDS) is now 35% instead of the previous 39%. Lenders want to know how much of your income, each month, is going towards owning a property. This ratio is the total amount of all of your monthly housing-related costs, which includes your mortgage, property taxes, heating costs and 50% of your condo fees (if applicable), divided by your gross monthly income. If the answer equals less than 35 %, the lender can feel confident that you are able to pay your monthly housing costs.
- The maximum Total Debt Service ratio (TDS) is now 42% instead of the previous 44%. This ratio is the total amount of all of your monthly debts divided by your gross monthly income. The lender will take the same GDS calculation, and add in any other monthly payments that you have to make, including loans, minimum payments on credit card debt or lines of credit. The lender adds together your mortgage payments, property taxes, heat costs and 50 % of your condo fee (if applicable), and debts, and divides this by your gross monthly income. If the answer is less than 42%, then the lender will know you have the money to meet your monthly payments and you will be on track to getting approved for a mortgage.
- Sources of your down payment, that increase your debt, can no longer be considered as equity. “Borrowers must provide the down payment from their own resources” says CMHC. This can include savings, equity from the sale of a property, a non-repayable gift from a relative, funds borrowed from other liquid financial assets, or against other real property or a government grant. This means that you can no longer use an unsecured personal loan, unsecured lines of credit or credit cards (yes, believe it or not, some people have used their credit cards as part of their down payment!).
These changes in the rules have a major impact on the value of the home you can afford. Right now, a family with an annual income of $100,000 and a 10 percent down payment would qualify for a home valued at $524,980. With the new rules, that family can now only qualify to purchase a home worth $462,860, which is $62,000 less – a huge difference. Similarly, a family that would have qualified to purchase a home worth $900,000, and with the new rules, they can only qualify to purchase a home worth $790,000, losing approximately 12% purchasing power.
While CMHC predicts a decline in home prices of 9 to 18 percent over the next year, other experts do not agree with these predictions, citing the fact that home prices have remained steady, if not slightly higher than they were a year ago.
However, there is hope, as CMHC’s two competitors, Genworth and Canada Guaranty, have not made any plans to change their lending rules, as of yet. All three companies provide mortgage default insurance for any high-ratio borrowers who are purchasing a property with less than 20% down.
The minimum payment a home buyer must put down is at least 5%.
Mortgage default insurance is not to be confused with mortgage insurance or mortgage life insurance which protects a homeowner’s family in the event of death or illness.
To learn about mortgage insurance protection, this CBC video explains what you need to consider when purchasing mortgage insurance.
First Time Home Buyers Will Be the Hardest Hit Under the New Mortgage Qualification rules effective July 1, 2020
These new mortgage qualification rules make it more difficult especially for first time home buyers, They may be able to obtain additional funds if it’s a gift from their parents or relatives, however they would not be able to borrow part of their down payment from a line of credit, or any other sources that would add to their debt load.
For families that have been saving their money, they now find themselves in a dilemma of rushing to buy a home before July 1st or purchasing one of less value after the new rules are implemented. If you can take advantage of buying a home before July 1st, please don’t lose out, as the mortgage interest rates are at an all time low.
As a full-service financial brokerage, Blackmore Levy Group is an independent mortgage broker. We are able to shop for the best mortgage amongst the banks, credit unions and private lenders to find the best fit for your circumstances.
We are also licenced to sell life insurance to take care of home owners and their families in the case of death or illness, so they do not have to worry about paying the mortgage on their property under these circumstances.
As new home buyers we know you may have lots of questions about these new mortgage rules. Let us help you through the process. Make an appointment with us today to see how we can assist you. Call us at 1.888.520.6520 or connect with us via email.