House hunters take note: buying a home will be a little tougher, starting on July 1, 2020.
CMHC announced this week that they are tightening the rules to qualify for a mortgage. As the economic fallout continues from COVID-19, being overleveraged with household debt creates dangerous vulnerabilities, particularly in an environment when the economy is in recession and job losses have been substantial.
Similarly, as housing prices fluctuate more dramatically in some areas due to the economic impacts, there is danger of being over-indebted with mortgage debt in relation to home equity. Housing is just one of the many sectors that have been adversely impacted by COVID-19.
This, coupled with business closures, high unemployment as well as a drop in immigration numbers has prompted CMHC to proactively review their underwriting requirements in order to mitigate these vulnerabilities.
CMHC hopes that these moves might constrict demand, in turn keeping home prices in check. They also hope that these changes will help to mitigate risks to taxpayers, given the potential increase in mortgage default as unemployment rises and the economy endures turbulent times.
CMHC released a report at the end of May that doesn’t paint a rosy picture for real estate in Canada in 2020. Given the speed and the extent of the impact of COVID-19, in the report they predict a substantial drop in housing starts and a decline in sales activity. They also suggest that housing prices could drop from anywhere to 9-18%, with the likelihood that they would rebound by 2021.
While all buyer segments who don’t have 20 % or more down will be impacted, these changes are anticipated to most directly impact first time homebuyers, who in many cases may not have enough borrowing history to build up a credit score, which takes time and borrowing experience.
It's worth noting as well that when first time homebuyers are significantly impacted, there is inevitably spillover to the other buyer segments and the natural progression of the property ladder with supply and demand. The building of wealth in real estate relies heavily on that flow.
According the CMHC statement, ass of July 1, 2020, they will:
• Limit the Gross/Total Debt Servicing (GDS/TDS) ratios to our standard requirements of 35/42
• Establish minimum credit score of 680 for at least one borrower
Furthermore, non-traditional sources of down payment that increase indebtedness will be not be treated as equity.
To summarize these changes, you can’t borrow for a down payment, require a higher credit score and require a greater cushion in income to cover all household debts. Additionally, CMHC has suspended refinancing for multi-unit mortgage insurance, with the exception of if the funds are being used for repairs or reinvestment in housing. If you are buying pre-construction, you would likely still fall under the prior qualification criteria.
In the release, Evan Siddall, CMHC’s President and CEO said,“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians. These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
It is also important to note that these changes at present apply only to CMHC insured mortgages. This is a change put forth by CMHC itself, not the government, which means that Genworth and Canada Guaranty mortgages are not currently affected.
So, for house hunters out there, what exactly does all this mean, and how does this influence purchasing power? We consulted with Urbaneer’s friend, Mortgage Jake.
He said, "Currently the rule is, with credit scores of 600+, you can use 39% of your income to help getting a mortgage. Therefore a $100,000 income earner with a $2200/year property taxes and $500/m maintenance fees could borrow 4.8x their income. (As a hypothetical)."
"Now, with the changes of max 35% income: debt ratio, they will be able to borrow 4.2x income. This represents a decrease of approximately 12.5% LESS borrowing power."
"In 416/905, I don't have to tell you what a crucial blow this is to a first-time buyer. CMHC wants prices to come down so that 100% of Canadians can 'afford' housing. The problem is, they're 10 years too late for that."
What strategies can house hunters use to secure their properties within these new rules and diminished purchasing power? Mortgage Jake says:
“For one, ask the bank of mom and dad for enough down payment to get to 20%, or ask the bank of mom and dad to help you co-sign. Also, you could find a property that's outside of your area you wanted to buy in and move to an area you can qualify for. Another third strategy is to find a property with a second income stream to bring you below the 35/42 ratios."
Thank you Jake! We always value your advice, especially at a time like this when the economy is in turmoil!
Now more than ever, it makes good sense to have a well-thought out, data-driven strategy when buying a home that lets you properly consider all of your options. We’re here to help!
For other recent posts on mortgages and money matters matter try:
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-The Urbaneer Team
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
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