In a recent report to the Standing Committee on Finance, Evan Siddall, CEO of the Canada Mortgage and Housing Corp. (CMHC) forecasted a decline of 9% – 18% in home prices over the next 12 months. Because of this, CMHC announced on June 4th a tightening of their rules on mortgage insurance effective July 1, 2020.
What You Need to Know
The change will make it harder for those with a smaller down payment (less than 20%) to access CMHC’s default mortgage insurance.
The change will require at least one of the applicants to have a higher minimum credit score of 680 which is 80 points above the current minimum. It has also updated the requirements for gross and total debt service ratios to 35% and 42% of annual income respectively. Prior to this update, approvals were 39% and 44% of annual income.
These changes do not mean you will not be approved with a smaller down payment, but the lower debt service ratios will reduce your buying power by roughly 11%, Check out our article on buying a home during a pandemic for more information.
The CMHC is also limiting the use of unsecured lines of credit for down payments.
What is CMHC Default Mortgage Insurance
Mortgage default insurance is mandatory in Canada for any home down payment between the minimum 5% up to 19.99%.
Default insurance protects lenders in the event the borrower cannot continue making payments on their mortgage. It is used for Canadians who would likely not be able to enter the Canadian real estate market otherwise. Since the federal government introduced sweeping changes to mortgage qualification in 2017 insured mortgages have received lower rates than uninsured (conventional) mortgages. These latest changes will likely hit first time home buyers the hardest.
The Effects of COVID 19 on the BC Mortgage Market
The housing market has started to pick up after a record low of housing sales in April and should continue to grow as people feel more confident in large purchases. The mortgage market, however, had a record busy month when the prime rate hit a record low in April of 2.45%. Learn more about mortgage refinancing.
The combination of record low-interest rates and the economic uncertainty brought by the COVID-19 pandemic has many people concerned about cash flow. A Free Mortgage Review by the Ingram Mortgage Team could save you thousands of dollars in interest, https://ingrammortgageteam.com/understanding-mortgage-refinancing/Get more information on renewing your mortgage during the pandemic.
What to do if You’re Interested in Buying a Home
While it can be scary to see such large changes in the market while you are looking to purchase a new home – especially as a first-time buyer you are not out of luck. While the CMHC is the largest insurer of mortgages in Canada there are other private options. Genworth MI Inc. and Canada Guaranty Mortgage Insurance Company provide default insurance to the residential mortgage market in Canada. Just like CMHC. Both have announced they will not be following CMHC’s new guidelines. Although it may look harder for new home buyers and buyers close to the limit to purchase a home under the new rules there are options.
Requirement Checklist For CMHC Pre-Approval
This change will make it harder for some people to enter the housing market as unemployment and the effects of COVID 19 continue to affect the market. To check on your pre-approval options here is a quick checklist to help you understand if your family is ready to buy a new home according to CMHC.
- Your new home is in Canada
- The max purchase price must be below $1,000,000.
- Minimum down payment of 5% for a purchase price of $500,000 or less, if the home is over $500,000 the down payment is 5% ut to $500,000 and 10% for everything after that
- The down payment must be from your own resources unless gifted by an immediate relative
- Your total housing costs should not be more than 35%
- Total debt load should not be more than 42% of gross household income
- You will require closing costs of 1.5% to 4% of your homes purchase price
Our team believes in paying off your mortgage faster. With our Inflation Hedge Program, your Mortgage Freedom Day will be much closer. Check out the difference a few extra payments willhttps://www.ingrammortgageteam.com/ make on paying off your mortgage. Your family may be excited to get into that big dream home but talk to our team about your options.