Government Mortgage Agency (CMHC) Tightens Mortgage Rules
On June 4th, The National Housing and Mortgage Agency (CMHC) announced that it is changing its mortgage effective July 1st.
They are reducing their risk appetite. CMHC is a lending business, and a crucial part of lending is assessing the risk that borrowers may not be able to repay a mortgage and the likelihood that a home may not be worth enough to pay off the mortgage. In effect, they are protecting taxpayers from footing the bill for bad loans, and they are protecting homebuyers who are ‘stretching themselves’ from taking on too much risk in a downturn.
In a strong economy, people get pay raises, jobs are easy to find, and home values rise so lenders can increase their risk appetite. The opposite happens in a recession.
According to the CMHC, they are implementing these changes because “Job losses, business closures and a drop in immigration are adversely impacting Canada’s housing markets, and CMHC foresees a 9% to 18% decrease in house prices over the next 12 months.”
The CMHC will implement the following changes:
1 - Reduced Mortgage to Income Ratio
The agency reduced the mortgage amount borrowers can obtain for a given income. We ran some rough, back of the napkin, calculations using the old and new ratios. A household with an income of $100,000 that would qualify for a $510,000 mortgage today would be eligible for a $460,000 mortgage after July 1st. We assumed condo fees of $350 per month and a monthly heating cost of $80. This one change reduces a homebuyer’s budget by 8% to 10%. Home sellers should adjust their expectations accordingly.
2 - Raised Minimum Credit Scores
CMHC raised the minimum credit score to qualify for a mortgage from 620 to 680. Due to job losses and pay-cuts, they likely expect credit scores to drop. So someone with a good score today is more likely to have a fair score in 6 months. Today, they are reducing exposure to people with Fair-Poor credit.
3 - Homebuyers can no longer borrow money for their down payment
Exotic or creative sources of down payment that increase homeowner debt levels will no longer be treated as equity for down payment purposes.
This is not about housing policy
These moves by the housing agency are not intended to increase affordability. “COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” said Evan Siddall, CMHC’s President and CEO.
“These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
