In a press release yesterday, the Canada Mortgage & Housing Corp. (CMHC) announced a new series of mortgage rule tightening initiatives in a bittersweet effort to protect Canadian homebuyers. You can click here to read the full statement.
Among the changes effective July 1, 2020, at least one borrower must have a minimum credit score of 680 (up from 600) and the total household-to-total debt ratio – percentage of income used on household debt – has been reduced to 35% (down from 39%).
In the statement, Evan Siddall, CMHC’s CEO, acknowledged the accelerant factor of COVID-19 which has “exposed long-standing vulnerabilities in our financial markets.” The recent economic downturn has already witnessed a fall in national home prices and many speculate that trend will continue.
While pundits question the timing of this decision – click here for a BNN editorial on the matter – the intent to protect and limit risk is clear. The CMHC is making it more difficult to obtain insured mortgage financing (required for all buyers with less than 20% down payment). They don’t want new homebuyers to get caught with an over-valued loan in the face of potentially declining equity.
While their goal is to keep clients within a more modest affordability range, this is not good news for Ottawa buyers who may already be struggling to enter the market. The raise in minimum credit score is significant and could shut many buyers out. The change in shelter cash flow ratios will also serve to dampen a client’s top end purchasing power.
It is important for our clients to note that this is a CMHC announcement, and as the release states: “These decisions are within CMHC’s authorities under the National Housing Act.” This is not a directive from the Ministry of Finance. As such, as Canada’s private mortgage insurers, Genworth’s and Canada Guaranty’s criteria is not directly affected. Early indications seem to suggest that the private insurers will not follow in lockstep with these changes, but each are currently determining their specific response. More details are expected early next week, and you can be sure that we will keep you posted.
As always, I welcome your questions so don’t hesitate to reach out if you have concerns about this news.