In Canada, mortgage insurance is mandatory for loans between 5% to 20% down payment. Mortgage default insurance is available at Canada Mortgage and Housing Corporation (CMHC), Genworth MI Canada Inc., and Canada Guaranty Mortgage Insurance Co.
CMHC is a federally owned crown corporation and acting as a publicly-owned insurance company for residential mortgages since 1954. CMHC also bulk purchases insured loans bundled and insured by CMHC as mortgage-backed securities.
CMHC offers housing research and advice, helping Canadians with their housing needs and supporting the housing market and stability of the financial system. CMHC predicts a 9% to 18% decrease in house prices over the next 12 months and is revising the underwriting policies for insured mortgages to protect future home buyers and reduce risk.
Effective July 1, the following changes will apply for new applications for home purchase and portfolio mortgage insurance:
- Limiting the maximum gross debt service (GDS) ratio drops from 39% to 35%.
- The gross debt service ratio is the share of income used to cover the mortgage and other housing costs like property taxes, property association dues, and utilities.
- Limiting the maximum total debt service (TDS) ratio drops from 44% to 42%.
- The total debt service ratio is the share of income used to cover housing costs plus the cost of paying other debts such as credit cards, personal loans, car leases etc.
- Raising the minimum credit score requirement from 600 to 680 for at least one borrower.
- A credit score/report is used for borrower application approval. It is typically between 300 and 900 score and calculated based on the length of borrower’s credit history, overall credit risk, or willingness to pay debts.
- Prohibiting non-traditional sources of down-payment that increase financial obligations.
- The borrowers must now pay the down payment from their own resources including savings, the sale of a property, non-repayable financial gift from a relative, funds borrowed against their liquid financial assets, funds borrowed against their real property, or a government grant.
- Suspending refinancing for multi-unit mortgage insurance except when the funds are used for repairs or reinvestment in housing.
CMHC revisions to underwriting policies will apply to all insured mortgages including high ratio as well as low ratio mortgages securitized by CMHC-Canada Mortgage Bonds Department. Genworth and Canada Guaranty would most likely adopt new underwriting measures as well. All 6 Chartered banks (National Bank, RBC, BMO, CIBC, BNS, TD) will also match their guidelines with CMHC new insured mortgage guidelines sooner or later. Private lending companies will most likely revise their criteria too.
The COVID-19 pandemic has affected all sectors of Canadian’s economy from housing, to job losses, business closures and drop in immigration volume, negatively impacting Canada’s housing market. Despite home prices rising 3 per cent from a year earlier, we are hearing major concerns around us. Here are few:
- The new mortgage guidelines may impact pre-approved mortgages in the midst of the home buying process.
- CMHC’s rule-tightening would impact insured borrowers currently counting for roughly 20% of new mortgages.
- CMHC’s new debt service ratio policy will cut homebuyers’ purchase power by up to 11% increasing the minimum current stress test from 4.94% to 6.30%.
- New home construction could drop by as much as 75 per cent.
- The mortgage arrears rate could spike from 0.2 per cent to 0.8 per cent roughly twice as high as its highest point during the financial crisis of 2009.
- The new announcement, in the heart of a global economic and racial chaos, could further slow the market.
How are you impacted during this uncertain time? What is your action plan to adapt?
Should you have any questions regarding real estate or refinancing, we will be happy to connect you with experts on our home team.
With Love and Gratitude