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Normally, you don’t rock the boat when you’re already taking on water, but that’s what CMHC has done.
Despite a weakened housing market, the nation’s largest default insurer is making it tougher for people to get a mortgage. That is, for borrowers with higher debt loads, lower credit scores and borrowed down payments.
Here’s CMHC’s official announcement. Its changes take effect July 1, 2020.
Below are updates we’ve collected throughout the day…
10:25 p.m. (Final) Update
- CMHC’s new debt-ratio policy will cut homebuyers’ purchase power by up to 11%. For example, someone earning $60,000 with no other debt and 5% down could afford approximately 10.9% less home under CMHC’s new rules. That’s like jacking up the minimum stress test rate from 4.94% (where it lies today) to 6.30%!
- In a report tonight by RBC Capital Markets, Genworth and Canada Guaranty reportedly indicated that the choice to adopt any/all of CMHC’s changes is theirs. CMHC’s policies were not an industry-wide mandate by the Department of Finance.
- Insured borrowers currently account for roughly 20% of new mortgages. A top insurer executive once told us that credit score, loan-to-value and geography all predict defaults on these loans better than debt ratios.
- 20% of down payment funds from first-time buyers came from borrowed sources, according to a Mortgage Professionals Canada survey in February. Yet, only 2% of down payments for CMHC-insured borrowers with loan-to-values above 90% were from “non-traditional sources” like unsecured credit and loans.
- CMHC’s rule-tightening could cost it 20% of its business, say analysts. It could eventually lose its decades-long status as market share leader in the Canadian default insurance market.
- Liquidity is key if home values dive. Yet, CMHC’s decision today may shift more of its business outside of big urban areas and into less urban and less liquid real estate markets. That’s because borrowers in Greater Toronto and Vancouver generally have higher debt ratios— and borrowers with higher debt ratios and less than 20% down payments would choose Canada Guaranty or Genworth by default, since they’re the only games left in town.
- Today’s announcement is just the latest in a long series of measures that have reduced CMHC’s business. It makes one wonder—from a taxpayer standpoint—if Ottawa should have sold the crown corporation’s commercial loan insurance business before CMHC started dismantling itself.
7:51 p.m. Update
- From CMHC: “Starting July 1, 2020, borrowers must pay the down payment from their own resources. These eligible traditional sources of down payment may include savings, the sale of a property, non-repayable financial gift from a relative, funds borrowed against their liquid financial assets, funds borrowed against their real property, or a government grant.”
- From Paul Taylor, CEO of Mortgage Professionals Canada: “As a custodian of taxpayer-contingent liability for their $500 billion portfolio, I understand CMHC’s need to continuously review risk acceptance criteria. However, I think the timing for the introduction of these restrictions is poor, especially given the Federal government itself is pouring billions of dollars into the economy to keep it afloat. These measures are procyclical, and will potentially exacerbate the 9-18% house price reductions CMHC has already warned of, by disqualifying many would-be borrowers from entering the market. Fortunately, I understand the private mortgage insurers are not likely to follow CMHC’s changes in lockstep, so the differentiation in risk appetite between them may reduce the contractionary economic impact, and see a shift in market share away from CMHC to the private insurers.”
- If Genworth and Canada Guaranty don’t lower their debt ratio limits, the credit score change may be the story here. There’s a chance all three insurers could lift their minimum scores to 680 (for at least one borrower on the mortgage application). If that happens, these homebuyers are out of luck if they don’t have 20% down and don’t want to pay crazy private lender rates.
5:43 p.m. Update
- CMHC statements:
- “Our forecasting suggests the ratio of household debt to disposable income will climb from 176% in late 2019 to well over 200% through 2021. These measures are intended to curtail excess demand and household indebtedness.”
- “Job losses, business closures and a drop in immigration are adversely impacting Canada’s housing markets, which stand to see a 9% to 18% decrease in house prices over the next 12 months.” (It seems CMHC’s CEO, Evan Siddall, knew these policy changes were coming when CMHC made this prediction a few weeks back.)
- Only 5.9% of CMHC-insured mortgages in the first quarter had credit scores below 680.
- Spoke to housing analyst Will Dunning earlier. His question is one many will ask: “How does changing the maximum GDS/TDS mitigate risk related to job loss or income reduction?”
- The following can no longer be used for down payments at CMHC: unsecured personal loans, unsecured lines of credit and credit cards. (Yes, believe it or not, some people do/did buy homes and put some of their down payment on plastic.)
- Private insurers will likely announce their stance next week, we’re told. There’s a better chance of them matching the 680 credit score minimum—and possibly the new down payment restrictions—than the debt ratio tightening. We shall see.
- CMHC changes apply to all default insurance it sells (high-ratio and low-ratio).
- “They do not apply to [Genworth or Canada Guaranty] insured mortgages that will be securitized in NHA MBS and Canada Mortgage Bonds,” said a CMHC spokesperson. That means mortgage finance companies will still have a way to fund non-CMHC-compliant mortgages, which in turn means consumers will still be able to get those mortgages cost-effectively.
- That said, we would not be surprised in the least if rate premiums and/or default insurance premiums were higher for borrowers with debt ratios above CMHC’s new limits.
- As for CMHC dropping its insurance premiums now that its loan book is getting less risky, that’s “wishful thinking” one lender told me.
4:30 p.m. Update
- Just in. CMHC’s official announcement.
- “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.”
- CMHC adds: “These decisions are within CMHC’s authorities under the National Housing Act and are in anticipation of potential house price adjustment.”
- Critics of the move will argue:
- There’s a misconception that borrowers with high debt ratios are significantly more risky. Insurers don’t approve many such borrowers, even if they fit within the official guidelines. Insurers aren’t stupid. They insure borrowers who are highly likely to pay on time, based on years of insurer data and experience.
- A large proportion of high-debt-ratio borrowers are professionals in liquid housing markets with high incomes and temporarily high debt loads, many with big student loans.
- This move will make the stress test tougher, but if the government follows through on easing its minimum qualifying rate (i.e., the benchmark rate), that could offset CMHC’s announcement to a large degree. The benchmark rate change was scheduled for April but postponed indefinitely due to COVID.
- There is no change to down payment rules. There was fear of down payments rising to 10% minimum a few weeks ago after CMHC’s CEO expressed opinions on it. But that could have all-out nuked the market. Today’s announcement is just a big cannonball…unless these changes are more widely adopted at some point.
3:07 p.m. Update
- Reliable sources tell us there’s a high probability private insurers will not match CMHC’s more conservative debt ratios. The privates would still serve most (not all) of these “Non-CMHC Compliant” applications, but they’d underwrite them more carefully to avoid an “adverse selection” of borrowers.
- That limits the overall borrower impact from this news, unless CMHC applies its rules to all securitized insured mortgages, which would limit choices and hike costs for insured borrowers who don’t fit CMHC’s new guidelines.
- With the government spending hundreds of billions on economic life support, lenders we’ve spoken to are incredulous that CMHC (a crown corporation) would tighten rules now.
- It’s “hard to believe they would make a move like this in the middle of a pandemic,” one lender head said. And on a side note, lenders are ticked that they just found out about this yesterday.
2:21 p.m. Update
From what we hear (this is unconfirmed), effective July 1, the following may apply to CMHC-insured mortgages:
- Maximum gross debt service (GDS) ratio drops from 39 to 35
- Maximum total debt service (TDS) ratio drops from 44 to 42
- Minimum credit score rises from 600 to 680 (for at least one borrower)
- Borrowed down payments will be banned
We’ll update this info if/when CMHC makes an announcement, which is expected this afternoon.
What Will This Do to the Housing Market?
Sixty-one percent of first-time buyers buy with less than 20% down (i.e., get an insured mortgage), according to data from Will Dunning and Mortgage Professionals Canada.
How they’re affected and the fallout from CMHC’s move depends on whether:
- Private insurers impose the same rules
- This would limit all options for borrowers who don’t have 20%+ for a down payment and don’t qualify with CMHC
- Big 6 banks, which dominate prime-mortgage lending in Canada, eventually harmonize their low-ratio mortgage guidelines with these new insured mortgage guidelines from CMHC
- If so, the change could have a broader impact on borrowers
- CMHC will impose its changes on all insured mortgages that are securitized (i.e., sold to investors). CMHC runs Canada’s mortgage securitization business, with direction from the Department of Finance.
All three of these things are unlikely near-term, which means the housing impact may be less than many fear. Albeit, CMHC’s pro-cyclical rule tightening is sure as heck not helpful to market psychology. It’s no secret that homebuyer and homeseller confidence significantly influence home prices.
There will be much more to come as we get additional updates. We’ll post it all here.
49 Comments
I guess we will wait and see but all these rules PLUS an unreasonable “stress test” makes home buying impossible for the average Joe. This only benefits foreign investors ready to prey on a weakened real estate market
I totally agree with Andres. Adding to the Stress Test is not looking too good for young families trying to get into the housing market.
I disagree with Andres. For far too long have Canadians been comfortable running large debt loads with a sense that someone else will bail them out. There is no sense of responsibility, which is why it is unfortunate that the government has to spoon feed them. Gone are the days where people would be embarrassed to admit they had to declare bankruptcy. Yes this will restrict the market for more prospective homebuyers and potentially increase the amount of foreign buyers, but that is not an excuse to encourage people to make poor decisions on the backs of taxpayers. That is another problem that the government will need to address separately.
Genworth`s most recent investor relations documents show that it does virtually nothing below 660 and has virtually nothing on its books with a combined low credit score and TDS over 40 – go to their web site, its right there. As a taxpayer, why should a crown corporation take on very risky business that the private sector wont touch with a 10 foot pole. why is CMHC tightening on the margins such a news story. as a tax payer, why should I shoulder the risk of a borrower who cant get their credit score over 680. Spy, what am i missing.
Hi David,
Insurance is the business of indemnifying against risk. Default insurers are expert at quantifying risk. It’s what they do.
Present guidelines adequately shield all three insurers from undue losses over the course of a full business cycle. That’s why we’re going to see Genworth and Canada Guaranty continue to underwrite 39/44 borrowers. It’s just good business — i.e., they know there will be losses but the losses be less than the premiums over time.
CMHC knows the same thing. It just chooses not to cherry pick the 39/44 borrowers that are common sense approvals. i.e., it’s decided to avoid potential volatility and earn less for you the taxpayer, for reasons that are not purely capitalistic.
Will this also effect refinancing as most banks bundle mortgages with portfolio insurance?
So do these new rules lower the
Purchasing power of 1st time home buyers?
Hi Vincent,
They do if the mortgage is CMHC insured.
We’re still waiting on word from Genworth and Canada Guaranty (the two private default insurers) to see if they will also reduce their maximum debt ratio limits. If they don’t, which is the current assumption, then non-CMHC compliant borrowers with decent credit and at least 5% down from their own resources will still have a way to get a mortgage without any loss of purchasing power.
So if I put down more than 20% these new rules do not apply? More concerned about the debt ratios than the other rules personally.
Hey Jeremy, If you put down 20% you can get a non-CMHC insured mortgage so yes, for the foreseeable future, CMHC’s new rules need not apply. If anything changes we’ll report it here.
First time home buyers can’t catch a break what is home ownership supposed to be a pipe dream anyone making less than 50k can only afford a shack down by the river…
Great article Rob and team.
We can all speculate all we want but it’s hard to predict in this crazy market. Vancouver seems relentless to price adjustments and big pockets buyers so far seemed to be the ones getting an advantage.
Instead of doing sheet why can’t government allow first time home buyer an amortization of 30 yrs, even with 5% down. Please think about this CMHC people.
Joel my thoughts exactly! CMHC played a pivotal role in the housing market and now that the pandemic might affect their bottom line they do this… Hard to lose when you write your own rules. 5% down should have had never been a thing….
At the end folks, the CMHC has done what they wanted for so long….the government has now stepped in ….may be some cut backs!!! Bye bye
Well this is not good news! Every Canadian deserves to have a roof over there head. If you can’t afford rent and now can’t afford to buy a house We will end up with more homelessness!!!
What about using RRSP? Can first time home buyers use RRSP as a down payment?
My closing date is July 27th and I have an approved mortgage for purchase with 10% down payment (which I got last week from bank) and CHMC insurance. Would this change also impact those who are currently approved and are closing July 1st onwards ?
CMHC and government should open their eyes and acknowledge the real culprit to high property prices. SUPPLY. When it takes 3+ years for approval of the simplest development that dramatically adds to the product cost and limits supply. The number of jobs created supplying homes is among the most important in Canada in terms of jobs. From producing the products that go into our homes, assembly of those homes, sales of those homes and don’t forget the relentless taxation of those homes. Making sure buyers are not over extended is a Reasonable position but don’t set policy based on prices. Figure out how to increase supply. The market prices will adjust on there own.
I started my pre-Approval process in March 1 week after my job closed. Does that mean there is no chance for me to become a owner? The housing market in Canada is very difficult, especially for immigrants. I’m trying to think if I should buy land in my country with my down payment instead of buying stress here in Canada. I’ll make a better investment there without paying a bunch of taxes in Canada if I resell it in less than 5 years. God bless immigrants who still invest in our country. It’s better for us in some ways. ??
Anita, I like your comments. The other side of the border is not that way. Most people buy their roof. I don’t know why Canada makes life very difficult for its own citizens and immigrants. No matter how hard we work here, our lives are not too different than someone who choses to collect a welfare check. It’s like Canada doesn’t value people who work hard who pay taxes. In this country life is more tuff for us.
Isn’t this a good thing for brokers? Banks don’t help their clients understand and improve their credit scores, but many brokers do. A 680 FICO(formerly BEACON) score isn’t that hard to get it if you know how it works. I’ve seen scores close to 700 with a 1yr old R9.
In response to Braden…
Since when has the taxpayer been on the hook for the housing market? Its the people who are buying homes getting mortgages, that are bailing out taxpayers all the time…
Its a crime to have CHMC, constantly shirking its role as a critical high leverage insurance provider for new homebuyers to get into the market… all the while charging ridiculously high fees for the past 30 years with almost zero liability costs, it should have built up a portfolio enough to bail out 100 percent during these times….
The greater travesty is locking out whole generations of Canadians to home ownership, will only weaken Canadian Values and society.
I think this has its own advantages for first time buyers in the long run.
Let’s assume the most likely scenario that this puts more pressure on prices (as it should, less buying power with the same amount of cash in hand, tighter mortgage rules, etc …).
Let’s say I am a potential buyer with 25K +5K for closing costs in hand, looking to buy a 500K property now. I am looking at a 2050$ mortgage payment and about 350$ property taxes. This will most likely be a condo so add strata and insurance fees of 400$ min per month. Let’s say I am paying 1400 for rent now. In a year, I will have about 42K + 5K in hand assuming my 30K was sitting in a 0 interest chequing account, and assuming absolutely no other savings. With a 10% drop in prices, the same property will cost 450K now. Add the property taxes to that and I’d say I can buy that or something similar in a year. I will most likely have to pay less to CMHC for insurance. I have the chance to improve my credit score a lot in a year and negotiate a better rate with lenders. Oh, I may have gotten a raise.
This is a very much worst case scenario. If I cannot save half of the mortgage I probably shouldn’t buy now. I don’t afford it.
If I am well qualified, with a good income, and I can sit tight and save a little bit of the rest of my income, I might be able to shorten the one year period to probably half. Don’t forget that, to afford that 475K + CMHC fee mortgage, I have to show 100K+ income that has been there for some time. I bet I can save a little bit more!
Buying a house is an investment for life. Don’t rush it.
Looks like I added property taxes twice 😛
This will really drive the Windsor market crazy! When Covid is over and all those folks in major cities are given the green light to work from home, home will be anywhere that is affordable…. Windsor. Here you can buy a brand new 2200 sq foot home on a 50x 120 lot for about $600K! Here you can buy a fixer upper for about $300K… As a realtor here, this market will get even crazier! Thanks CMHC!!!
I have the same question as Bianca
Would this effect those who buy June but close after July?
Hey Vincent, A mortgage approved before the rule change gets the old (current) rules. Moreover, Genworth and Canada Guaranty will still offer the old guidelines, so there are options for you.
They make it so hard for first time buyer, they need cut this crap of down payment, it’s so hard have to a pay 1700 rent each month , can’t n even save for a down payment for house, alot of people going to homeless, because they can afford a house in Ontario, this is awful and very disappointed, this is what taxpayers get, living like damn bum, work to pay other people mortgage, when I should able to afford a house without this nonsense.
Great news. Thanks for protecting taxpayers’ money.
Horrible news. Thanks for reducing taxpayers’ revenue.
Pretty sad that my kids will probably not be able to afford to get into the housing market anytime soon. How is a young family going to come up with say 100,000.00 down payment for an average 500,000.00 house. They want prices to go down but the wealthy will reap that too by buying up as rental property. I can’t even comprehend this move.
Paul, 100K is 20% of 500K. Qualified people can purchase with 10% down. Still, with a market that is expected to relax a little bit, purchasing with 10% down considering 3.1% CMHC fees, about 3% realtor fees and about 2% property transfer tax means buyer is writing almost all of their 10% off immediately.
M I was under the assumption first time home buyers don’t usually pay property transfer tax and don’t realtors pass there fee to the sellers when your buying?
Thanks Vincent, that’s right, for properties up to 500K, there are no property taxes if you are a permanent resident or Canadian citizen. It wasn’t true when we bought our first property and I all forgot about it 🙂
For realtor fees, I meant when you sell it, sorry I had to be clear about that in my comment. It is true that the realtors pass the fees to the seller, but 1) no one lives in their houses forever, specially younger people who move or up-size eventually. So, that is due when you want to cash your investment. and 2) The sellers work that into the price already.
Why dont we restrict or eliminate non residents buying property in our country. It would allow for more stable affordable home prices. People who work in Canada and pay taxes and contribute to their economies should not be penalized for not being wealthy. It is a dream for most Canadians to own their own home and I find it insulting that our country allows this to happen. Middle class is almost non-existent now. Rich keep getting richer. Our young people can only hope for 2nd and 3rd generation wealth.
In response to Terry,
Banning foreign buyers creates other economic problems but it’s getting to the point where we have to entertain such extreme measures. This wouldn’t be necessary if the pencil pushers in Ottawa did their jobs to balance supply and demand. CMHC, the housing minister and premiers in ON and BC have dropped the ball. This “National Housing Strategy” is a joke for middle class Canadians.
The biggest issue from a home price perspective is probably immigration. Immigration is fine in general but it makes housing more expensive for our citizens. If politicians are going to let 300,000 people in our country every year they damn well better ensure that 150,000 new homes are waiting for those people when they arrive. That is not happening and it is a disgrace.
It’s so sad because we are first time home buyers . We purchased a newly built and closing isn’t until 2021. With 10 percent down and this new CHMC rule , it will be harder for us to get approved for a mortgage. On top of that all the down payment will be forfeited if we don’t get approved . And than to start saving from scratch again which will take years with housing markets . So heartbreaking all our savings going down the drain just like that . It just really sucks for people who are actually responsible with their expenses and bills.
How is this affecting you Layla? If you already put 10% down, and plenty of time to improve credit score if not good, and/or consolidate debt or high monthly payments.
Layla,
I don’t understand. Why don’t you just tell your lender to send your application to Genworth or Canada Guaranty? Their policies haven’t changed.
Layla, if worst comes to worst you can always sell on assignment selling the property before occupancy hits you will get taxed more if you happen to make profits but I don’t think you’ll “lose your 10%”
Please bare with me as I’m not a broker or an investor. I’m older nearly 60 myself and my wife wants to sell our home to buy a home near the lake to just try to have a better life being disabled and getting CPPD.
We would have close to $80,000 to put towards a home. We watch what we buy and buy what we can afford. We have hardly no debt, and our credit score is high.
So now if we want a home by the lake as paying a mortgage is way way cheaper than renting these days we would only qualify now for a $170,000 mortgage with putting 20% down on top. It doesn’t make sense to me that my mortgage payment now is higher than the mortgage payment what I’d barely qualify for the $170,000, which we pay every month Plus pay all our other bills.
So people like us have to suffer. We miss out on decent homes worth $40,000 more than we can get. I bought our home we live in now when being on CPPD for more than we can get now. It’s frustrating. So to Braden, not all people who get a mortgage with lower incomes go bankrupt. Thanks guys have a great day.
We have 1 day left to close but our insurer still haven’t got back to us if they are going to insure our mortgage. Aren’t they obligated to let us know at least few days before closing date?
Hi Alex, Sounds like you had a rush deal, someone dragged their feet and/or there was a problem with the property or your qualifications. Normally mortgage applications are sent to default insurers well before the closing date. The insurer’s main obligation is to underwrite your application to its satisfaction in a reasonable time period. I don’t know your situation so can’t comment on what’s reasonable in this case.
Yes let them cut of their noses despite their faces. I have half down for a purchase of a condo and a credit rating of 830 and yet for the ridiculous stress test I can’t get a 115000 mortgage due to my income ratio. CMHC deserves to lose out in the end for their insane stress tests. I won’t be be selling or buying in the near future because of the insane rules. I am sure many are in the same boat as I am. Soon CMHC and lenders won’t have their jobs either cause the rich don’t need them. Furthermore I would love to see someone rent a one bedroom at 600 some odd dollars. Not going to happen. More homeless people can’t afford to put a roof over their heads. So disgustedly sad.
In light of new CMHC ruling on July 01, 2020 that people cannot use borrowed funds to buy housing….,
1. Is it only for homebuyers who are putting less than 20% or is it for everyone, irrespective of down payment?
2. Can I use my HELOC to buy an Investment property, given that I had to put at least 20% for down payment and CMHC Insurance is not required at all?
Hi Sagun,
CMHC’s policy change did not eliminate all borrowed down payments. It banned down payments from unsecured loans, unsecured lines of credit and credit cards.
1. The change only applies to all CMHC-insured mortgages (regardless of the down payment size).
2. Yes, if you qualify and the lender allows it (and most do) you can still borrow the down payment from your own HELOC.
I am so confuse here. Can hard working Canadians get a break. My husband and I saved and saved, we have regular jobs and started a small business. We jump at a chance to purchase a new built Jan 2021, when covid was nowhere in sight. We have the 20% down, our credit score is more than 750, stable incomes yet we have to run up hill, jump over valleys, swim the entire ocean just to get approval for a mortgage of 480,000. Jesus, we have little debt, 7000$ to be exact and we are still being asked to pay that off.. this system is design to leave people broken, emotionally/mentally and financially! We are just tired at this point..
Government needs to review the rules for first home buyers. How people will afford to continue paying the rent for single family for 2500$. All Canadian dream to buy their home. How are we going to survive with this matter. How about our kids where they will be in 10 years. Jobs are not secured at the moment, people are loosing jobs due to the pandemic. If Gov are not taking actions, this will end up with more homeless, crime, and we will living with our children and our first generation to our household. Please help and review this situation.