CMHC’s new mortgage rules will come into effect July 1st, 2020 and they will force some first-time buyers out of the market in the GTA.
Effective July 1, the following changes will apply for new applications for homeowner transactional and portfolio mortgage insurance:
- Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to CMHC’s standard requirements of 35/42;
- Establish a minimum credit score of 680 for at least one borrower; and
- Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes.
The impacts of CMHC’s new mortgage rules will vary across the country but let’s look at how each of these measures would impact the GTA real estate market.
Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to CMHC’s standard requirements of 35/42
Gross and total debt servicing ratios are calculations lenders use to determine how much a borrower can afford to borrow. GDS & TDS compare your debt payments and housing expenses to your gross household income (CMHC calculator).
According to ratespy.com, this CMHC policy change will cut first time home buyers purchasing power by about 11%.
Establish a minimum credit score of 680 for at least one borrower
Raising the credit score minimum requirement from 620 to 680 will probably have the least impact on buyers in the GTA. “A” lenders typically require a credit score in the high 600’s to qualify even before CMHC’s ruling.
Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes.
According to a Mortgage Professionals Canada survey in February, 20% of down payment funds from first-time buyers came from borrowed sources. 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. Source: RateSpy
The Bank of Mom & Dad will still be allowed to help first-time buyers with their down payments. Given that only 2% of CMHC backed loans were using non-traditional sources for the down-payment, I believe that this policy will also have minimal impact on the GTA housing market.
Genworth won’t follow CMHC
Genworth is a private mortgage insurer and they have announced that they won’t be following CMHC’s new mortgage rules. Source: Source: BNN Bloomberg
The bottom line
Will CMHC’s new mortgage rules affect the entry level market in the GTA?
Limiting the Gross/Total Debt Servicing (GDS/TDS) will have the biggest impact of all the measures as it will diminish first-time buyers purchasing power by about 11%. The effects this can have are:
- Price increases for entry-level units outside of downtown. Buyers that can no longer afford a condo downtown could move east, west, or north.
- The amount of buyers for entry level properties (think bachelor condo downtown, 1 bedroom in Etobicoke, or 2 bedroom townhouse in Pickering) will most likely not change. As the buyers who could barely afford to buy a property prior to the CMHC announcement drop out, buyers from the pool in the price range above get pushed down.
- This could affect the more expensive property types (ex: 2 bedroom condo downtown, townhouse in Etobicoke, 800k semi in Pickering). They might lose buyers to the pool in the price range below with no new buyers to replenish from the price range in the pool obove.
WIth Genworth as an alternative, I believe that CMHC’s new mortgage rules will have some impact on the GTA housing market, but it won’t be substantial. Anyone that is putting more than 20% down will not be affected by this change.
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