Canada’s housing agency The Canada Mortgage and Housing Corporation (CMHC), has announced that it will tighten mortgage qualification rules for the high-risk borrowers. This is a controversial move that can curb credit in the economy that can emerge from its deepest contraction of the post-war era.
The state-owned Mortgage & Housing Company, which was offering default insurance to home buyers with the lowest down payments, has announce the narrow eligibility criteria as of July 1. Now the new buyers need a high credit scores and low debt burdens to qualify for the mortgage. Agency also said that this move will protect new home buyers from falling prices and also reduce taxpayer risk for market correction.
Although, the change can slow housing market activity. As the federal government, and the state’s bank regulator and central bank of Canada are flooding the economy with hundreds of billions in cash to stoke credit and to fuel recovery.
It will be more challenging from now to obtain mortgage insurance for a home purchase from July 1, particularly for the new buyers/ first time buyers.
The Canada Mortgage and Housing Corporation (CMHC) have unveiled strict policies on last week for insured mortgages including:
· Limiting Gross Debt Service ratios to 35%, earlier was 39%.
· Limiting Total Debt Service ratios to 42%, earlier was 44%.
· Raised the minimum credit score up to 680 (from 600) for at least one borrower.
· Limiting the non-traditional sources of down payment.
CMHC CEO Evan Siddall has said that the COVID-19 has exposed serious vulnerabilities to our financial markets, and we need to act now to protect the economy of Canadians.
New policies will protect homebuyers, reduce government and taxpayer risk. It will also support the stability in housing markets. And at the same time curtail excessive demand and unreasonable house price growth.
The CMHC’s new debt-ratio policy can lower down the new homebuyers’ purchasing power by 11 per cent, according to analysts.
As if a new buyer making $60,000 a year with a five per cent down payment. And without any pre-existing debt to afford a home with home price that is roughly 11 per cent lower than earlier.
What do the Changes Mean for Buyers?
· CMHC’s changes will effectively reduce homebuyers’ purchasing power by up to 11%.
· Roughly 18% of CMHC’s high loan-to-value originations had a Gross Debt Ratio of more than 35%
· 5% of CMHC’s originations had credit scores of less than 680, according to Mortgage Professionals Canada.
Is CMHC Going It Alone?
One of the most important questions since a leak of the new rules made the rounds on Thursday has been whether CMHC’s competitors, Canada Guaranty and Genworth Canada, would need to adopt the stricter underwriting measures also.
According to the RBC Economics report, they won’t, a minimum of not for now.
Genworth Canada (MIC) and Canada Guaranty (CG) confirmed to us that they need not been told to adopt any or all of an equivalent underwriting changes,” the report notes. “…although we might not be surprised if they were to eventually adopt some nor maybe all of the changes.
For what it’s worth, that very same report notes that it’s “interesting” that CMHC delivered the announcement, since mortgage insurance market changes have historically been announced by the Department of Finance.
Reaction of Mortgage Industry
The announcement elicited wide-ranging opinions from throughout the mortgage industry. Here are a number of them…
“I think the changes are well-intentioned, but poorly timed. I understand the rationale, but the people most in danger of default are already in their first home and insured. Disqualifying purchasers now won’t improve the standard of the portfolio already in danger ,” Mortgage Professionals Canada CEO Paul Taylor told CMT.
“The federal is spending billions of dollars to support a struggling economy,” Taylor said. “These changes actively suppress activity.”
Ron Butler of Butler Mortgages Inc. also understands CMHC’s motive, acting essentially as an insurance firm.
“They must be prudent within the face of an economic disaster,” he said. “It’s hard to argue against better credit scores when you’re insuring a $940K mortgage. (And) 680 is just a correct credit score.”
And while first-time buyers may face the brunt of this about-face, Butler noted they will easily choose a lower-cost property, which can be easier in certain regions compared to others.
“Ultimately, I’ll take these changes over a tenth minimum deposit any day,” Butler said, pertaining to the about-face floated by Siddall several weeks ago.
Is it wrong time to “Tinker” With Policy
While many understand where the policy adjustments are coming from, others are adamant that now’s the worst time to implement such changes.
“I would argue against tinkering with mortgage underwriting criteria in light of the pandemic-driven housing market slowdown,” True North Mortgage Founder and CEO Dan Eisner told CMT. “Some of those changes could also be needed, but the timing is questionable…it’s as silly as buying an umbrella after a flood. Now’s the time to be encouraging economic activity.”
Asked which measures are going to be the foremost restrictive for first-time buyers, Eisner said first-time buyers are going to be most-impacted by the increased income requirements.
“Keep in mind, this alteration arrives not too long after the Department of Finance implemented the qualifying rate assay, which already pushed many homebuyers out of the market”
Some, including Butler, foresee a quick increase in home-buying as people rush to get before the new rules become.
“There are going to be a minor spike in sales supported this alteration, and then comes the September Cliff,” Butler said, pertaining to an expected drop by activity once the widespread mortgage deferral programs come to an end this fall.
With all these update what does it means? This is the perfect time to secure your mortgage at a lowest rate with fewer barriers. As the update will be in effect as of July 01, 2020 you can still apply for mortgage with old rules until June 30, 2020.
If you have any questions or planning to apply for a mortgage, do not hesitate to contact me.