What You Need to Know About Canada’s New Mortgage Rules

Effective July 1st, 2020, the Canada Mortgage and Housing Corporation (CMHC) is expected to tighten requirements surrounding insured mortgages. How will the changes affect home buyers and the Edmonton real estate market? Here’s what to expect:

What Are the Changes and Why? 

According to officials, COVID 19 has made Canada’s financial markets more vulnerable and, as a result, measures must be taken to protect the economy. Specific measures include:

1. Increasing the minimum credit score to qualify for a mortgage from 600 to 680 (for at least one borrower).

2. Limiting the Gross Debt Service Ratio (GDS) from the standard 39% annual income to 35%.

*Your GDS Ratio is the percentage of income required to pay all monthly housing-related costs such as mortgage principal and interest, taxes and heat (and 50% of condo fees). 

3. Limiting the Total Debt Services Ratio (GDS) from the standard 44% annual income to 42%.

*Your TDS Ratio is the percentage of your income required to cover your total debts (car payments, credit cards, student loans, etc.)

4. A ban on all non-traditional sources of down payment prone to “increasing indebtedness.”

*Homebuyers will no longer be able to borrow funds for a down payment

Despite conflicting reports (in which prices are said to be holding steady), the CMHC has predicted as many as 20% of insured mortgage holders may fall into arrears as a result of the pandemic – with home prices potentially decreasing anywhere between 9% and 18% over the next 12 months (not just in the Edmonton real estate market, but across Canada). 

In light of these predictions, the CMHC has decided to implement these new rules as a means of supporting a stabilized housing market, protecting homebuyers and decreasing taxpayer/government risk – all while reducing excessive demand and unsustainable increases in housing prices.

See the CMHC’s Housing Market Outlook for more information 

How Will the New Changes Affect Edmonton Home Buyers? 

As per the mortgage comparison experts at RateSpy, the new debt-ratio changes will decrease a homebuyer’s purchasing power by as much as 11%. As an example, a buyer looking to purchase real estate in Edmonton with an annual income of $60,000, no outstanding debt and a 5% down payment will be able to afford roughly 10.9% less home (akin to raising the mortgage stress test rate from the current 4.94% to 6.30%).

Currently, roughly 18% of CMHC mortgage applicants needing high-ratio financing have a GDS of more than 35%, and approximately 5% of all applicants have a credit score lower than 680.

The Good News Is…

Canada’s other two major mortgage insurance providers, Canada Guaranty and Genworth Canada, have confirmed they will not be adopting the new changes. According to both organizations, their current underwriting processes are already sufficient in both protecting home buyers and managing financial risk.

Note, one in three mortgages are insured through Canadian banks, with insured borrowers accounting for approximately 20% of all new mortgages.

For further information on the CMHC’s new mortgage rules, we urge you to visit CMHC Reviews Underwriting Criteria. 

Are you thinking about buying a home in Edmonton? Grab your free guide, Six Essential Tips That Make Home Buying More Affordable.

Photo credits: shutterstock.com

Categorised in: Buying a Home, Mortgage & Financial

This post was written by Terry Paranych Real Estate Group