CMHC RULE CHANGES the rennie brief
WHAT YOU NEED TO KNOW ABOUT CHANGING MORTGAGE DEFAULT INSURANCE CRITERIA • Beginning 1 July 2020, CMHC is making it more difficult for home buyers with less than a 20% down payment to obtain mortgage default insurance • Broadly-speaking, first-time home buyers will be impacted the most, however the restrictions will impact any borrower who has a low credit score, is intending to use borrowed funds as the source of down payment, or is facing a high debt service ratio • While some individual borrowers will see their purchasing power curtailed (partially or entirely) as a result of these rule changes, the overall market impact is expected to be minimal
24 JUNE 2020
While some home buyers will be negatively impacted by CMHC’s new criteria for determining who is eligible for default insurance, the overall market impact is expected to be minimal.
WHAT IS MORTGAGE DEFAULT INSURANCE? Home buyers whose down payments are less than 20% of their purchase price are required by lenders to obtain mortgage default insurance. This helps to protect lenders against mortgage default by the purchaser. Most home buyers purchase mortgage insurance from Canada Mortgage and Housing Corporation (CMHC), a federal crown corporation. The cost of obtaining mortgage default insurance varies on a sliding scale based on the buyer’s loan-to-value (LTV) ratio, from 4.0% for an LTV of 95% (that is, a 5% down payment) to 2.4% for an LTV of 80% (a 20% down payment). The insurance premium can be paid by the home buyer as a lump sum or added to the mortgage and included in monthly payments. WHAT QUALIFICATION CRITERIA ARE CHANGING? Effective 1 July 2020, CMHC is making the qualification criteria for obtaining mortgage default insurance stricter. Specifically: • the minimum credit score required of at least one borrower (or guarantor) will rise from 600 to 680; • CMHC will restrict purchasers’ ability to use credit or debt as the down payment source (for example, a home equity line of credit associated with the buyer’s principal residence used as the down payment for a second-home purchase); and • purchasers’ maximum total debt service ratio (TDS) and gross debt ratio (GDS) will be lowered from 44% to 42% and from 39% to 35%, respectively. According to CMHC, these changes are intended to bolster the financial system and stabilize housing markets across the country.
WHAT COULD THIS MEAN FOR OUR MARKET? These changes will directly impact some buyers (and specifically first-time buyers), including those with low credit scores, those who intend to use borrowed funds for a down payment, and those with high debt service ratios. For households with a gross income of $100K, for example, the lowering of the maximum GDS could reduce their maximum loan by $70K. That said, there are a number of reasons to believe the aggregate impacts on housing markets will be marginal at best. 1. Nationally, only 16% of chartered banks’ residential portfolio is associated with LTV ratios of less than 80% (i.e. loans that require default insurance). It is also worth noting that in the Vancouver Region, 28% of MLS home sales over the past 12 months have had a purchase price of at least $1 million, meaning purchasers of these properties are required to have at least a 20% down payment (and therefore are not required to obtain default insurance). 2. Canada Mortgage and Housing Corporation is one of three insurers of residential mortgages in Canada, the other two being private companies (Genworth and Canada Guaranty). Notably, these two insurers—who together account for approximately 25% of Canada’s mortgage default insurance market—will not be following CMHC’s lead in changing the mortgage default insurance rules on July 1st. In other words, some borrowers who otherwise would have been impacted by CMHC’s rule changes may be able to work around them. 3. According to the latest data from CMHC, only 5.8% of new mortgage holders have a credit score lower than 660. This share has fallen from a recent high of 8.8% in Q4 2013. In BC, the share is 5.6%, and in Metro Vancouver it’s 5.4%. 4. Finally, CMHC indicates that only 10% of borrowers with CMHC mortgage default insurance have a GDS of more than 35%.
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