Know Before You Borrow: An Overview of CMHC’s Latest Rule Changes
The COVID-19 pandemic has put the Canadian economy under serious strain. While the federal government’s various financial rebate programs have kept most Canadians from complete bankruptcy, these are unquestionably lean times for most households.
Naturally that means that major purchases, such as home buying, are going to be affected. When mortgages are extended wildly out of a purchaser’s ability to repay, it can make a bad economic situation that much worse. Instead, the Canadian Mortgage and Housing Corporation, which is the primary insurer of mortgages in Canada, has stringent rules to ensure Canadians are not borrowing more than they can afford. Now, in the wake of this year’s economic uncertainty, they have tightened those rules even further.
In Canada, home buyers are required to carry insurance if they make a downpayment of less than 20 percent of their home’s purchase price. The insurance protects lenders in case borrowers default on their mortgage, however stringent rules are in place to ensure that purchasers are not guaranteeing themselves financial ruin. As of July 1, 2020, the new requirements include:
Borrowers must have a minimum credit score of 680, which is a significant change from the previous requirement of 600;
Purchasers are no longer allowed to borrow their downpayment from unsecured personal loans or credit cards, and must fund the downpayment from their own resources such as cash or existing home equity;
Gross debt servicing ratio is now reduced from 39 per cent down to 35 per cent; and
Total debt servicing ratio is reduced to 42 percent down from 44.
So what does this mean for home buyers? The rules did not change the amount of money required for a downpayment (there was speculation that it would change from 5 to 10% of the purchase price for homes under $500,000), but Canadians will have significantly less wiggle room in what they are able to afford.
For example, the previous rules would allow a family with a household income of $100,000 to purchase a home worth just under $525,000. Now, that purchase price is reduced to just over $460,000, which is a significant decrease. Additionally, while home prices may be on the decline due to pandemic fears, it is still nearly impossible to find a single family home in most of the Greater Toronto Area for anything less than $500,000, which in turn creates a significant demand on the rental market.
The new CMHC rules may be challenging for those looking to enter the housing market. Homes are the largest purchase most of us make, and the beauty of a mortgage was to be able to stretch your budget far beyond what you could afford to pay up front. Now though, while the changes will likely keep many from making a dangerous compromise, they will make home buying well out of reach for others.
For those looking for help navigating a difficult mortgage situation, there are other options. Other insurance providers, such as Genworth and Canada Guaranty, did not align with CMHC’s rule changes and may be more appropriate for borrowers in more precarious situations, however certain lenders may not be as accepting of these alternative insurers. At Sari Rose Law, we take the time to walk you through the complicated world of mortgages, and make sure you are in the best position possible heading into your purchase. Contact us today to set up a consultation where we can discuss your mortgage needs.