The Canadian Mortgage and Housing Corporation (CMHC) has announced 3 key changes to their mortgage security policy:
- Borrowed down payment is no longer available: a very small cross-section of consumers are impacted by this change as not many opt-in to exercise this option. Borrowed down payment was allowing the consumer to draw funds from other credit facilities (ie. credit cards and lines of credit) and applying them towards the down payment of their purchase. A payment would have been required to be factored into the overall debt servicing, typically 3% of the balance. In my opinion, the removal of borrowed down payment is "no news" as it was not a viable option for most consumers to begin with.
- Debt servicing ratios reduced from 39/44% to 35/42%: this is a major impact to buyers looking to put less than 20% down payment as it has reduced their overall mortgage qualification amount by 9-13%.
- Minimum credit score (beacon) for the primary applicant is now 680: the Primary borrower is the individual on the mortgage application that has the higher income. For example: husband and wife are looking to purchase their first home, wife earns an annual salary of $150K and has a credit score of 640, while the husband has an annual salary of $80K but has a 820 credit score. In this scenario, the wife would be the Primary borrower due to the higher income, in which case they do not qualify for purchasing a home with less than 20% down payment. These changes to the minimum credit score requirement will play an enormous factor in the market, and not for the better. It is difficult for the average Canadian to manage a high credit score as we are significantly leveraging out outside debts (credit cards and lines of credit) to maintain the lifestyles that we lead. So that missed credit card payment from 2 years ago, or those 2 missed payments on your line of credit 3 years may come back to haunt you. It doesn’t take much for your credit score to drop, it does take its time to slowly climb back up again. These clients will now be required to come up with a minimum of 20% down payment.
Why these changes?
In my opinion, these changes are implemented for 1 reason only: the Government has failed to increase supply in the housing market while housing prices have continued to increase. Its no secret that the housing market has significantly slowed down since the pandemic, and as many units (buying and selling) have not been transacted as compared to previous years. The mindset is to “cut” buyers out of the market, which in-turn, should “cut” the housing prices.
Who is being impacted?
To be clear, these changes are impacting First Time Homebuyers, individuals who are looking to sell their existing home and upsize, and individuals looking to purchase secondary homes. They do not have an impact to individuals who are currently homeowners who are looking to refinance, or are up for renewal.
There are 2 other insurers outside of CMHC, they are Genworth Canada and Canada Guaranty. Both Genworth and Canada Guaranty have advised that they WILL NOT be following suit with CMHC’s announcement to changes in mortgage insurance qualifications.
If you have any questions, or require additional clarity on any of the above changes, feel free to call or email me, more than happy to help.
Sherwood Mortgage Group
529 Wilson Avenue, Toronto ON M3H 1V1