Canada’s new mortgage rules and how it will affect homebuyers

In a move to stabilize the housing market and protect the interests of lenders, the Canadian Mortgage and Housing Corporation (CMHC) announced a series of changes to the eligibility rules for mortgage insurance.

This new stroke can come as a negative tiding for first-time homebuyers as it will lower the amount of debt an applicant for an insured mortgage can carry, raise the minimum credit score to qualify for the mortgage insurance and force homebuyers to pay the down payment from their own pocket.

CMHC protects lenders by providing insurance in the event of mortgage default by homeowners. Normally, mortgage default insurance is paid by homebuyers if the down payment is less than 20% of the purchase price.

Property experts say that the new rules will protect Canada’s housing market by arresting the unrealistic housing price fluctuations.

What led to this sudden change in mortgage rules?

Canada’s housing market witnessed a severe battering with the onset of the pandemic. The red-hot spring market went cold in just a few weeks and home sales tanked to historic lows.

Average housing prices are predicted to swing drastically between 9% to 18%.

The Bank of Canada slashed interest rates thrice, taking the rates from 1.75% to a paltry 0.25%. This led homebuyers to borrow heavily, thus raising the debt levels of the Canadians. According to a study, Canadians are among the world leaders in household debt.

The debt deferrals because of the pandemic have put added pressure on the banks. Add to that CMHC’s forecast of decreasing housing prices and an increase in unemployment and the financial picture of Canada looks disastrous.

The pandemic has exposed the stark vulnerabilities of the financial market and these new mortgage rules prescribed by CMHC will protect homebuyers, reduce government & taxpayers’ risks and stabilize the housing market.

What are the new mortgage rules?

The new mortgage rules come into force from July 1, 2020. The changes that will dampen the mood of first-time homebuyers are as follows:

  1. Limited gross debt: All homebuyers having excellent credit scores and good income can now spend up to 35% (earlier 39%) of their gross income on housing and can borrow only 42% of their gross income including credit cards and other loans.
  2. Revised minimum credit score: In order to qualify for mortgage insurance, the borrower now needs a minimum credit score of 680 (earlier 600).
  3. Axe on borrowed down payments: Borrowers will now have to fork out the down payment money from their own pockets (earlier the borrower can provide the down payment through unsecured personal loans). The down payment may come from the borrower’s savings, liquid financial assets or equity from the sale of the property.

How will home buyers be affected?

The revision of mortgage rules can have a cascading effect on homebuyers. With this change coming into effect from July, an average homebuyer’s purchasing power will get eroded by 11%. This will push the mortgage stress test rate from 4.9 % to 6.3%.

This mortgage stress test will push homebuyers to qualify for a higher five-year mortgage rate.

In the multi-family sector that depends on low-cost insured mortgages, the new mortgage rules will have minimum impact. However, the sector is well prepared for more stringent measures.

For landlords, the restrictions apply to the use of funds that are borrowed for financing properties with more than five units. The funds can only be applied to property purchases, construction, and repairs.