As mentioned below, CMHC is one of three mortgage default insurers in Canada. The other two, Canada Guarantee and Genworth, have announced they will not be following the changes CMHC has proposed. CMHC changes are specific to their own business, which is a relief to potential purchasers as they now have two options available that'll allow them to qualify under existing ratios after July 1st, 2020.
Who is CMHC and What are Their Guidelines?
CMHC (Canadian Mortgage Housing Corporation) is a Crown Corporation and one of three mortgage default insurers in Canada. If you have a down payment equal to less than 20% of the purchase price of a home, you are obligated to take on default mortgage insurance. This premium is incorporated into your monthly mortgage payments and is the sole benefit of the lender.
In order to qualify for a mortgage with less than a 20% down payment (High Ratio Mortgage), you must qualify under the insurer's guidelines as well. Some of those CMHC guidelines are as follows:
Minimum Credit Score of 600 for one borrower
GDS 35% and TDS 42%
Maximum 39% GDS and 44% TDS if Credit Score is 680+
Non-traditional down payment sources from items such as unsecured lines of credit can be considered equity for insurance purposes
After July 1st, CMHC will be changing it's guidelines and therefor changing the guidelines a high ratio borrower must meet in order to be approved for a mortgage:
Minimum credit score for one borrower to be 680
Maximum GDS 35% and Maximum TDS 42%
Non-traditional sources used towards down payment won't be counted as equity for insurance purposes anymore
What Impact Do These Guidelines Have on Qualifying?
GDS and TDS (Gross Debt Service and Total Debt Service) refer to the amount of debt you're allowed to take on in order to qualify for a mortgage. 39% GDS (Gross Debt Service) means the total of your monthly mortgage payment, monthly property tax portion, monthly strata fee cost (if applicable), and monthly heat cost must be less than 39% of your gross monthly income. TDS (Total Debt Service) is everything accounted for under GDS plus any other debt (credit cards, car payments, lines of credits, loans, etc.).
$100,000 of annual income currently allows you to afford a $480,000 purchase price with a minimum down payment of $24,000 (5%). This equals a mortgage of $474,240 which includes the insurance premium charged by CMHC. The monthly qualifying mortgage payment for this scenario would be $2,742.03, monthly property tax would be $150, monthly strata fees $300, and heat $50 a month. The total payments, or GDS, would be $3,242.03. This is 38.9% of the total monthly income of $8,333.33 ($100,000/12 months).
With the new changes coming July 1st, 2020 and maximum GDS falling from 39% to 35%, that same $100,000 income is only going to allow for a $423,000 purchase price assuming 5% down payment of $21,150. The new mortgage amount would be $417,924 which includes the insurance premium payable to CMHC. The reason this potential purchase price has decreased is because the qualifying mortgage payment needs to bring the GDS down by 4%. New qualifying payment would be $1,977.81 and everything else would remain the same (property tax, heat, strata fees).
Before July 1st, 2020, $100,000 of annual employment income will get you a $480,000 purchase price with a minimum down payment of 5%. After July 1st, 2020, $100,000 of income will get you a $423,000 purchase price with minimum down payment of 5%. Your mortgage affordability drops from $474,240 to $417,924- an 11.88% decrease in affordability.
Why Are They Changing These Guidelines Now?
According to CMHC, housing across Canada is expected to drop 9%-18% in value over the next 12 months. Some of the reasons for this expected decrease are related to the amount of people currently deferring their mortgage payments. They feel this is going to increase the potential default rate on mortgage payments and increase the amount of mortgages in arrears. Lay-offs and other factors resulting from COVID-19 are also expected to be determining factors in the decrease of value.
Why is all of this really happening?
Government hasn't been able to stimulate housing supply in major markets across Canada. With limited supply and continuing growth on the demand side, housing prices will increase. How do you combat increasing housing prices due to increased demand without a proportional increase to supply? Call for a 9%-18% decrease in housing prices while simultaneously debilitating a significant portion of potential buyers from entering the housing market.
All of those people in major urban centers who could afford up to $330,000 purchase price will essentially be priced out of the housing market or at least their geographical area as affordability will decrease by 10-12%.
If you are waiting to purchase, now is the time. If you plan on purchasing this summer, you need to re-visit your plans. There are many reasons to be pre-qualified, right now it is an absolute must. Reach out to our team today through email or phone at 778-237-4876 to see how these proposed changes are going to potentially impact you.