CMHC Rule Changes June 2020

Date Posted: June 5, 2020

In a move hailed by CMHC as a method to “protect future home buyers and reduce risk”, they have announced the following changes to their underwriting criteria effective July 1, 2020.

There are four main changes to CMHC’s lending policies with this announcement:

1)  Reducing the maximum gross debt service ratio (GDS) from 39 to 35.

2)  Reducing the maximum total debt service ratio (TDS) from 44 to 42.

3)  The minimum credit score increases from 600 to 680 for at least one borrower on the mortgage.

4)  Non-traditional sources of down payment (i.e. borrowed from a line of credit or credit card) will not be treated as equity for insurance purposes.

The changes above apply to home buyers that are purchasing a home with less than 20% down payment where the default insurance is provided by CMHC.

Based on recent previous mortgage changes, we expect that the July 1^st deadline will mean that home buyers must have a firm purchase and sale agreement on a specific property and a fully committed mortgage approval by that date to be eligible under the “old” rules.  This is unconfirmed at this time.

The combined increase of the GDS and TDS ratios represent a 9%-13% decrease in purchasing power for those with less than 20% down payment.

While the list is long of the information that we do not yet know, below are some important points that will require clarification:

1 )  CMHC is one of 3 major default insurers in Canada; Genworth and Canada Guaranty being the other two.  The announced changes are not driven by the Ministry of Finance, so this could be the first time where a major underwriting change does not impact all insurers identically.  It is possible in this instance that Genworth and Canada Guaranty may not adopt this new underwriting criteria, we are awaiting their response.

2 )  Homebuyers and borrowers with more than 20% down payment may also be indirectly impacted by this rule change. 

• Will lenders adopt this new set of criteria for their own standards with all mortgage approvals, regardless of the amount of down payment?
• Non bank lenders rely heavily on what is referred to as portfolio or bulk insurance to provide mortgages to the market.  This portfolio insurance currently requires the same criteria for mortgage underwriting that mortgages with less than 20% down payment require.  As balance sheet lenders, banks are not bound by the same set of requirements.  Like other recent mortgage rule changes, will this one disproportionately favour the banks and squeeze out some of the much needed competition in the industry?  Will interest rates need to rise as a result?

If you are currently looking for a home, or considering looking for a home, we recommend the following:

1 )  July 1^st may be a critical date for you to find a property.

2 )  If you already have a pre-approval, you should update it to consider how these changes may impact your borrowing power.  Contact your Mortgage Broker now.