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What the new CMHC rules mean for mortgage customers

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August 12, 2020

Earlier this month, Canada Mortgage and Housing Corporation (CMHC) introduced new rules that place more limitations on borrowers. Specifically, Canadians paying less than 20% on a down payment may find their path to a mortgage is blocked.  

According to CMHC, the new rules are necessary if it is to “protect homebuyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.” 

For prospective homeowners, there could be confusion about how the new rules will affect their chances of qualifying for a mortgage. Here's what you need to know about the changes made by CMHC.  

What are CMHC’s new mortgage rules? 

Canada’s largest Crown Corporation announced the new borrowing framework last month, before launching the changes on July 1. Under the rules, Canadians must match the following criteria to qualify for mortgage default insurance: 

  • Gross Debt Service (GDS) ratio of 35% or less (previously 39%) 
  • Total Debt Service (TDS) ratio of 42% or less (previously 44%) 
  • Minimum credit score of 680 (previously 600*) 
  • A down payment that doesn’t come from unsecured borrowing 

* At least one borrower on the mortgage application must meet this requirement. 

Who Do the Changes Affect? 

Importantly, the new rules only apply to the subset of clients who need default insurance on their mortgage and choose CMHC as their insurer.  

Default insurance is necessary for buyers who are putting down less than 20% towards purchasing a home. In this case, default coverage is a legal requirement and protects the lender if the borrower fails to pay on their mortgage.  

It is worth repeating that the rules only apply to customers taking out insurance with CMHC. Private insurance firms (Genworth Canada and Canada Guaranty) have said they will not be following suit with similar changes. Still, CMHC is Canada’s largest mortgage default insurer, so the new rules will affect many customers nationwide.  

Furthermore, an increasing number of Canadians are paying less than 20% towards their mortgage as it becomes harder to get on the property ladder. Mortgage Professionals Canada (MPC) points out 61% of first-time buyers put down less than 20% towards their mortgage. Given that 4 in 10 buyers are first timers, many customers face CMHC’s tough new rules.  

Will the New Rules Affect Canada’s Housing Market? 

By following a simple path, it’s easy to see how CMHC’s rule changes will affect Canada’s housing market. CMHC is the largest default insurer in the country, many mortgage customers are first timers putting less than 20% down when borrowing, many of those customers rely on CMHC for legally required mortgage default coverage.  

Certainly, choice is an important factor. Genworth Canada and Canada Guaranty deciding not to follow CMHC’s lead gives buyers more options. However, CMHC plays an important role because it provides coverage to buyers who may not get it through private companies.  

Data from MPC shows 5.9% of CMHC customers have a credit score of less than 680, while 20% of all down payment funds for first-time buyers come from loans or other borrowed sources. In other words, there is no guarantee that certain customers will have access to coverage from private insurers if they no longer qualify for insurance from CMHC.  

For these clients, paths to home ownership may be blocked and they will be effectively removed from the marketplace. Borrowers in this situation will be forced into co-borrowing, increasing down payments, or seeking cheaper property. The viability of any of those options will depend on the individual. 

As Canada’s mortgage market moves through uncertain times, having an understanding of rates has become increasingly important to consumers. Shopping for the best mortgage rates is good financial practice.

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