19 Jun CMHC tightens mortgage rules in latest response to COVID-19
Mortgage rules are undergoing some changes due to the current situation with Covid-19. The Canadian Mortgage and Housing Corporation (CMHC) announced changes to the eligibility rules for mortgage insurance, in the agency’s latest response to the COVID-19 pandemic.
What are the new rules?
The new rules will lower the amount of debt an applicant for an insured mortgage can carry, set a higher credit score to qualify for CMHC insurance, and will require a homebuyer to use their own, and not borrowed, funds for their down payment. CMHC provides insurance that protects lenders if homeowners default on their mortgage. If a buyer has a down payment of less than 20% of the purchase price, mortgage default insurance is required, and is paid by the homeowner. Some properties, including those with a purchase price of $1 million or more, are not eligible for CMHC insurance.
What are the different scenarios?
First change: Less debt as a percentage of gross income
Old rule: Buyers with good credit scores and reliable income could spend up to 39% of their gross income on housing (including their mortgage, property tax, heating bill and half of condo fees); and could borrow up to 44% of gross income once credit card, car payments and other loans are included.
New rule: All buyers will be limited to spending up to 35% of their gross income on housing, and can only borrow up to 42% of gross income once other loans are included.
Second change: New minimum credit score established
Old rule: Under the old rules, in order to qualify for an insured mortgage at least one borrower (or their guarantor) needed a minimum credit score of 600, which is only “fair” credit according to standard guidelines.
New rule: The new rules raise the minimum to 680—meaning buyers will need a “good” credit score.
Third change: No more borrowed down payments
Old rule: In order to make up the minimum down payment, a homebuyer could use unsecured personal loans, unsecured lines of credit and even credit cards. The minimum downpayment is 5% for houses valued up to $500,000, and 10% of the amount over $500,000, up to $1 million.
New rule: Borrowers must provide the down payment “from their own resources,” CMHC says. These can include savings; equity from the sale of a property; a non-repayable financial gift from a relative; funds borrowed from other, liquid financial assets or against other real property; or a government grant.
The “mortgage stress test” will remain unchanged. The stress test requires lenders to confirm that a borrower can still make their monthly mortgage payment even if interest rates rise. In February 2020, the CMHC announced that the way the stress test was calculated would change effective April 6, but those planned changes were suspended in mid-March in light of the pandemic.
For more on these changes, you can always contact our team. We’re here to guide you all the way.