Mortgage Insurance and Your Borrowing Power
As a Canadian homebuyer or homeowner, your borrowing power is impacted by a few factors. Recent changes to the lending policies announced by CMHC, The Bank of Canada’s qualifying rate and your banks’ Prime Rate and mortgage stipulations are all things to consider when thinking about purchasing a home.
If you have less than 20% down, mortgage default insurance is required (known as a high ratio mortgage). This insurance policy protects lenders in the event you, the borrower, ever stop making payments and default on the mortgage loan. What you might not know is that mortgages in Canada are insured by one of three companies: CMHC, Genworth Canada or Canada Guaranty. In addition, both the lender and the insurer need to approve your application once you have qualified. In order to qualify, all insured mortgages use the Bank of Canada’s Conventional 5 year fixed posted rate (also referred to as the Benchmark Rate), which has recently dropped to 4.94%! Once you’ve qualified, we can then start to shop the market for you to get the best financing options.
While homeowners are not able to specify the mortgage insurer they prefer, it is important to know what is going on with these companies as every mortgage is covered by one of these three - depending on your bank - and their policies directly affect you as a homeowner. Recently, falling home prices and a stalled economy due to COVID-19 have resulted in some policy changes to insured mortgages, specifically from The Canada Mortgage and Housing Corporation (CMHC).
The recent changes announced by CMHC on June 4, 2020 relate specifically to new applications for homeowner insurance, such as new purchases, as well as renewals; refinancing is not included. So, what are these changes and how do they affect you or a potential homeowner you know?
Credit Score Increase: Previously, the minimum credit score was 600 but has now been increased to a 680 mandatory credit score for at least one applicant. This is important as 80 points is a considerable jump when the score can only range from 300-900!
Down Payment Sources: The source of down payment options have changed. Now, you can no longer utilize borrowed funds towards the down-payment. This includes funds from credit card, line of credit or a loan with repayment terms of any kind. Your down payment must come from your own savings.
GDS/TDS Ratio: This is a ratio of “Gross Debt Service” / “Total Debt Service” and represents how much debt one can have in relation to income. The requirements for this have been decreased from prior potential of 39/44 to a more conservative 35/42. The result is reduced borrowing power in relation to existing debt and size of mortgage request to the allowed income.
Overall, these changes represent an approximate 9% - 13% reduction in what you may qualify for, which primarily impacts first time homebuyers. This is a large reduction in borrowing power and may seem quite restricting in terms of new qualifying policies.
Thankfully, there is some good news! These changes have only been adopted by the CMHC. Canada's other mortgage insurers, Genworth Canada and Canada Guaranty, have both announced they have no plans to make changes to their debt service ratio limits, minimum credit score and down payment requirements.
While there is still more information to come, and more changes may yet be made, it is a good idea for any potential homeowner to remain educated on the marketplace, especially those with upcoming renewals or plans to purchase.
If you are looking to renew your mortgage, or are a first-time home buyer wanting to make the most of your borrowing power, please contact me today. I would be happy to discuss these changes further and help you to find a mortgage provider that best suits your individual needs.