With the changes to CMHC can you still buy a home, what do you need to consider and how do these changes impact you?
Effective July 1, the following changes will apply for new applications for homeowner transactional and portfolio mortgage insurance:
- Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to our standard requirements of 35/42;
- Establish minimum credit score of 680 for at least one borrower; and
- Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes.
To further manage the risk to our insurance business, and ultimately taxpayers, during this uncertain time, we have also suspended refinancing for multi-unit mortgage insurance except when the funds are used for repairs or reinvestment in housing. Consultations have begun on the repositioning of our multi-unit mortgage insurance products. * CMHC - CMHC Reviews Underwriting Criteria
What is CMHC and why should you care?
CMHC is a mortgage loan insurance that lets you get a mortgage with less than 20% downpayment, for up to 95% of the purchase price of a home.
It also ensures you get a reasonable interest rate, even with your smaller down payment. This is important because it helps to stabilize the housing market and during economic slumps when down payments may be harder to save, it ensures the availability of mortgage funding.
CMHC is one of 3 major insurers, Genworth and Canada Guaranty.
Why have they made these changes?
CMHC predicts a drop in the "Canadian housing market" in the range of 8-18%, meaning a house purchased for $200,000 might be worth in the range of $185,000 - 192,000 and if you only put down the previous minimum of 5% ($10,000) there is fear that homeowners could walk away from mortgages.
Total Household Debt in Canada
There has been a lot of news on "Canadians being in debt" and Statistics Canada has also drawn attention to the "growing concern". However, it's important to understand what these ratios actually mean to you as a consumer.
Are you better off buying and becoming a homeowner or staying a renter?
In the example below, you see the Renter, we'll call Mr.Larry Renter, and the Homeowner, we'll call Ms.Susan Homeowner, make the same amount of income and after taxes have the same disposable income available.
Mr. Larry Renter doesn't like owning, he'd rather lease his car and has become accustomed to charging items to his credit card and paying those items/trips off over time. He lives in a nice 3 bedroom condo that he has rented for 3 years, paying $1,700/month. Over the 3 year period, Mr. Larry Renter has spent $61,200 on where he lives and he has $0 in equity.
Ms. Susan Homeowner owns her used car outright, she purchased her 3 bedroom house 3 years ago for $315,000 and had a mortgage of $300,000, paying approximately $1,350/month in payments. Ms. Susan Homeowner has spent approximately $48,000 on her home, say about half of that goes toward the interest of the home, $24,000 and a half pay down the mortgage, leaving her with a new balance of $276,000.
If Mr.Larry Renter was to move he would pack his belongings and find another home to rent, fill out an application form, pay the deposits and his rent and have a new home, he would be no further ahead financial unless the new place was less rent per month.
If Ms. Susan Homeowner decided she was going to move she would either rent or sell her home, let's say the market has gone down by 5% and she decides to sell her home for $300,000 she would have $24,000 off her property, getting her entire downpayment back and making an additional $9,000. If the market stayed the same and she sold her home for what she purchased it for, $315,000, she would have made her original deposit back, $15,000 plus, the $24,000 she paid toward the principle totalling = $39,000.
On paper, Mr. Larry Renter has a better debt ratio, but is he a better candidate than Ms. Susan Homeowner with a much higher debt ratio? Although CMHC might have some understandable concerns with people who do or will have a higher debt ratio the benefit of having an asset is an important difference.
What if you don't meet the new CMHC qualifications?
You don't need to fear never being able to purchase a home as you have options - Genworth and Canada Guaranty are both mortgage loss insurers that have since the announcement from CMHC said they will NOT be changing their requirements. If you speak with a mortgage specialist or mortgage broker they will be able to look at your qualifications and find you a mortgage and insurer that will be able to work with you (Check out our preferred mortgage brokers).