Although we're in midst of a phased re-opening of our economies, there is no doubt that COVID-19 is still affecting many sectors across Canada, including the housing sector. With respect to housing, if you're putting less than 20% down, being approved for a mortgage is about to get a little bit harder for you after the federal housing agency announced stricter lending standards that will take effect July 1st, 2020.
Whenever you're putting anything less than 20% down on a home, you're required by the lender to have mortgage default insurance added to your mortgage. On June 4th, 2020, The Canada Mortgage and Housing Corp. (CMHC) announced several changes to the requirements needed in order to obtain default insurance from CMHC, with the intent that these changes will help to protect borrowers from overextending themselves. If too many borrowers overextend themselves it can lead to problems for them and vulnerabilities in the housing sector as whole. Several changes were announced, with some being more notable than others.
Change Number One
The first change (and the one that will likely have the least impact) is that, non-traditional sources for down payments (borrowing from a line of credit or credit card) will no longer be treated as equity for purposes of default insurance. Prior to this new rule, as long as your monthly payments on the line of credit used to borrow the down payment fit within your debt servicing ratios, the borrowed down payment could be considered equity when determining whether mortgage default insurance was required. Borrowing funds for a down payment is NOT something we normally come across and in most situations is something we'd likely advise against.
Change Number Two
The second change is to the minimum credit score. Prior to the changes, a minimum credit score of 600 for at least one of the buyers was required in order to receive CMHC insurance. Moving forward, CMHC has upped the minimum credit score requirement to 680. According to credit reporting agency TransUnion, the average Canadian's credit score is around 650, which means there is a good portion of the population out there who will be affected by this new requirement. If both purchasers' credit scores fall below the 680 threshold, you'll be forced to cough up a down payment of at least 20% if you're wanting to buy a home.
Change Number Three
The final and the most noteworthy change announced by CMHC has to do with debt servicing ratios. As most readers are likely aware, debt servicing ratios are used be lenders to assess a borrower's capacity to make their monthly payment obligations. Lenders want to know that if they loan you money, that there is a good chance they will get repaid.
The Gross Debt Servicing (GDS) ratio is calculated by taking the total monthly cost of housing (principal, interest, taxes, and heat, condo fees if applicable) and dividing this amount by gross monthly income. Multiply that by 100 and you'll have your GDS ratio. The Total Debt Servicing (TDS) ratio is calculated by taking ALL of your monthly debt payments into consideration. Think things like credit card debts, lines of credit, or monthly car payments. You also divide this number by gross monthly income and multiply by 100 to arrive at your TDS ratio.
Prior to CMHC's changes, Canadians needed to have a GDS ratio of 39% and TDS ratio of 44%. Moving forward, the minimum requirement will be a GDS ratio of 35% and a TDS ratio of 42%. This means that for anyone looking to put less than 20% down on a home, they will have stricter requirements on how much income they'll need in relation to how much debt they owe. CMHC's goal is to protect Canadians and the economy by ensuring stability within the housing market.
CMHC is Only One of the Three Major Default Insurers in the Country
COVID-19 has exposed many of the vulnerabilities that lie within our economy and housing is no exception. Moving forward, if you're looking to purchase a new home and are putting less than 20% down, you may find yourself having a harder time securing the financing you need. It is worth noting that CMHC is only one of three major default insurers in the country. If you're a person looking to put less than 20% down, it might be worthwhile to speak to a mortgage professional to properly evaluate your options.
- Brandt Butt, Investment Advisor, CIM
Brandt Butt is an Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Brandt Butt who is an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.
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