In Canada, mortgage insurance is required for all home purchases involving down payments of less than 20 per cent. To curb demand from risky borrowers and to stabilize prices, the Canada Mortgage and Housing Corporation (CMHC) has introduced new rules that make it tougher to qualify for coverage in their mortgage insurance plan. The rules, which took effect on July 1, 2020, are as follows:
- Down payments can no longer be covered by borrowed funds (e.g. line of credit or other loans). However, non-repayable financial gifts can be used.
- The minimum credit score requirement has risen to 680 (up from 600).
- Gross debt ratio – the share of monthly household income toward mortgage/other housing costs – must not surpass 35 per cent (down from 39 per cent).
- Total debt service ratio – the share of monthly household income toward all debt – must not surpass 42 per cent (down from 44 per cent).
According to James Laird, Co-Founder of RateHub.ca and President of CanWise Financial, a family that earns $100,000 annually with a 10 per cent down payment would previously qualify for a $524,980 home. However, under the new rules, Laird says that the same family now only qualifies for a $462,860 home, a 12 per cent drop in purchasing power.
Using Laird’s example, we can extrapolate to the Fraser Valley. In May 2020, the HPI Benchmark Prices in the Fraser Valley were:
- Single family home: $990,400
- Townhome: $555,000
- Apartment: $433,700
Under the previous rules, the above-noted hypothetical family could have bought property that is relatively close to a typical townhome in the Fraser Valley. However, under the new rules, that family is precluded from buying anything close to a typical Fraser Valley townhome. Instead, they now qualify for a less desirable townhome or a typical apartment.
It is important to note that private mortgage insurers have not been required to adopt the new rules. This means that buyers who have less than 20 per cent for a down payment can skirt the new rules by going to alternative insurers. Private insurers are also likely to have higher premiums, which creates an additional financial risk for home buyers who do not qualify or choose not to get CMHC mortgage insurance.
If you have questions about the new mortgage rules and how they affect your unique financial situation, we encourage you to please talk to a mortgage professional.