EFFECTIVE July 1st 2020
The rules are intended for borrowers who have less than 20% down payment and need to access CMHC default mortgage insurance and take effect on July 1st, 2020.
- Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to our standard requirements of 35/42;
- The current ratios stand at 39/44 (GDS/TDS)
- GDS includes mortgage payments, property taxes, heating costs and 50% of condo fees as a percentage of your gross income, the percentage is dropping from 39% to 35%
- TDS includes mortgage payments, property taxes, heating costs and 50% of condo fees and any monthly debt obligations (car loans, credit cards, etc.) as a percentage of your gross income, the percentage is dropping from 44% to 42% ▪ Here is an example using the current mortgage qualifying rate of 4.94% and GDS limit of 39%, a family with an annual income of $100,000 and a 10% down payment would have qualified for a home valued at $524,980.
▪ Under the new GDS limit of 35%, the same household can now only afford a home of $462,860.
▪ This represents a decrease in buying power of almost 12%, due to the change in the GDS limit.
▪ It is important to note that in the fourth quarter of 2019, the average debt servicing ratios were well below the 35 per cent and 42 per cent thresholds, and depending on the metric, between 63% and 82% of all qualifying mortgages were below the limit. ▪ Paying down balances in full or partially can have a big impact on credit scores in a short period of time
▪ Pay off small loan balances in full now (i.e. student loan or car loan with a few thousand owing)
- Establish minimum credit score of 680 for at least one borrower; and
- This means that if two people are purchasing a home, one of them must have a credit score of 680 or higher
- It is very important to note that many lenders have been underwriting mortgages using this exact internal policy for several years, this is simply bringing all lenders in line
- What is being overlooked is that credit scores can be improved using simple strategies over a short period of time
- Non‐traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes.
- This means borrowers will not be able to use borrowed money for down payment, such as a line of credit or credit card advance
- To be fair this has been available for many years, but, only a small minority of borrowers ever choose to borrow their down payment
- NOTE: You can still get gifted money for down payment.
This is a the 8th major policy change in recent years. With every change comes the fear that things are going to come to a grinding halt. Our market has shown time and time again that our market adapts to the changes and continues to thrive.
- Borrowers may have to adjust their price expectations, as an example, a buyer who was looking at purchasing for $700,000 may have to buy at $600,000
- First Time Buyers may have to consider adding a guarantor to the mortgage (guarantors can be used to help qualify for a larger mortgage without actually being on title)
- Buyers can consider getting a gift from family to come up with 20% which opens up many more options for qualifying. This can still allow buyers to get into the price point they were considering initially and even avoid the CMHC Insurance
- A very small percentage of borrowers may have to wait to buy, but, again very few borrowers are actually buying at the maximum they qualify for, this also means that some will have to in order to achieve getting into home ownership
These changes don’t mean people can’t borrower money to purchase real estate going forward, it means:
Consumers need professional advice more than ever now. Reaching to out to potential buyers now to bring attention to these changes and the overall state of the market is just what they need to hear. Potential high ratio buyers need to be requalified as soon as possible to ensure they still qualify for the financing that they are expecting for a summer purchase.
Courtesy of Capital Home Lending