How The New Mortgage Rules Should Be Managed

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With already a difficult year in our hands, things have not been made better with tighter lending rules that came into force July 1st. Of course, that will make it harder for some Canadians to buy homes, but mortgage professionals say there’s no reason to panic 😉

The CMHC announced plans in early June to reduce borrowing limits, demand higher credit scores and restrict down payments for anyone who needs default insurance from the agency. That kind of insurance is mandatory for “high-ratio” buyers putting less than 20% down on a home.

While the change is “scary”, buyers still have ways to shape up in the eyes of the CMHC — or avoid the agency entirely.

Evan Siddall explains the changes are meant to steady the economy in the age of the coronavirus by controlling debt and protecting lenders from people who pose a high risk of defaulting.

While the rules will sting for some people trying to crack their way into the real estate market, they could be advantageous for others. By reducing the number of buyers, the Crown corporation hopes to quell demand and balance out home prices.

“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” CMHC CEO Siddall explained in a statement.

“These actions will protect homebuyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”

So, what are these new rules, 4 years on from the initial stress-test intro?

Homebuyers wanting a high-ratio mortgage are no longer able to submit a down payment with money borrowed from credit cards, unsecured personal loans or lines of credit. Only “traditional sources” of cash, such as savings, equity from the sale of a house or financial support from relatives, will fly.
The minimum credit score to qualify has increased from 600 to 680. If you don’t know your credit score, you can check it for free online. If it’s too low, you’ll have to find ways to improve it.
Borrowers are now capped at spending 35% of their gross income on housing. That includes the mortgage itself, property taxes and utilities. They’re also only able to borrow upto 42% of their gross income, taking into account all of their other loans and credit.

Previously, buyers could spend up to 39% of their gross income and borrow up to 44%. That means potential buyers saw their purchasing power cut by up to 12%.

For example, someone with a $100,000 income buying a single-family home could have qualified for a $490,000 mortgage with 5 per cent down before July 1. Now, their limit has dropped to $435,000.

Please note that, if you’re not a risky borrower in the eyes of the CMHC, these changes may not affect you at all.

“They are impacting a subset of borrowers who need mortgage insurance,” says a Toronto-based broker. Even those homebuyers, he says, “still have options.”

You see, the government doesn’t care whether it insures your mortgage. It just needs to know your mortgage is insured.

Homebuyers excluded by these changes should look around for a lender that also works with Genworth or Canada Guaranty, the country’s two private-sector providers of mortgage default insurance. Those companies have decided not to tighten their restrictions.

“They are usually lockstep with the CMHC, so this is definitely out of the ordinary,” adds the broker.

So even if the CMHC thinks you’re a bad bet, you’ll still find a range of lenders that want your business.

The other good news is that the new lending rules don’t impact homeowners who want to take advantage of today’s historically low rates.

“As of right now, the rules haven’t changed for refinancing,” says the broker. “The fact that Genworth and Canada Guaranty didn’t match the CMHC’s changes makes me think that there’s less likelihood of more changes in the future.”

Today’s rock-bottom rates are predicted to last for at least 12 to 18 months, until the economy starts to stabilize from the COVID-19 crisis.

That means there’s no better time to see how much you can save on interest and your monthly mortgage payments. The opportunity to hold on to more cash is especially welcome while the country’s financial outlook remains uncertain.

Whether you’re buying or refinancing, it pays to shop around and get the best deal. Compare rates from more than 30 lenders — including many that don’t need to use the CMHC.