On June 4, 2020, the Canadian Mortgage and Housing Corporation (CMHC) announced new qualification rules for mortgage insurance that may affect those looking for a home. The CMHC is a government owned corporation that provides mortgage insurance for home purchases with a down payment of less than 20%. For banks and lenders, this mortgage insurance is a requirement for any down payment amount below 20% of the cost of the home and is either paid as a lump sum or rolled into your monthly mortgage payments.
Starting July 1, the new rules taking affect include:
- The maximum ratio for your Gross Debt Service (GDS) calculation will decrease from 39% to 35%. GDS is calculated by dividing the principal, interest, tax & heat by your gross annual income.
- The maximum ratio for your Total Debt Service (TDS) calculation will decrease from 44% to 42%. TDS is calculated by dividing the principal, interest, tax, head & any other debt obligations (like car payments) by your gross annual income
- At least one of the borrowers on your mortgage application must have a minimum credit score of 680 (increased from 600 previously).
- Non-traditional sources for your down payment will no longer be accepted. Non-traditional includes unsecured personal loans, unsecured lines of credit, and credit cards. Traditional sources are still accepted including savings, equity from the sales of a property, and non-repayable financial gift from a relative.
What does this mean for home buyers?
Those buying a home with less than 20% down payment and going through CMHC for their mortgage insurance may find their purchasing power decrease. Some experts have estimated a reduction of up to 11%. For example, a household with an annual gross income of $120,000 would have previously qualified for a home costing $565,000. Under the new rules the same household would only qualify for a $502,000 home.