June 10, 2020

Understanding the new CMHC mortgage rules and how it affects you

By MODA Townhomes

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.

Keep in mind these new changes are only applicable for those planning on going through CMHC for their mortgage insurance. Other private providers such as Genworth and Canada Guaranty have announced that they will not follow the rule changes implemented by CMHC.

For more information on how this may affect your home buying journey, contact one of our sales people today.