WHAT IS MORTGAGE DEFAULT INSURANCE?
Mortgage default insurance, which is commonly referred to as CMHC insurance or just mortgage insurance, is mandatory in Canada for down payments between 5% (the minimum in Canada) and 19.99%. Mortgage default insurance protects lenders, in the event a borrower ever stopped making payments and defaulted on their mortgage loan.
There are three bodies responsible for providing mortgage insurance: Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada, and Canada Guaranty. CMHC is a federal Crown corporation, while both Genworth and Canada Guaranty are private insurers.
What are the recent changes?
On June 4, 2020, the Canadian Mortgage and Housing Corporation (CMHC) announced changes to the eligibility rules for mortgage insurance, in the agency’s latest response to the COVID-19 pandemic.
Change 1: Less debt as a percentage of gross income
Old rule: Buyers with good credit scores and reliable income could spend up to 39% of their gross income on housing (including their mortgage, property tax, heating bill and half of condo fees); and could borrow up to 44% of gross income once credit card, car payments and other loans are included.
New rule: All buyers will be limited to spending up to 35% of their gross income on housing, and can only borrow up to 42% of gross income once other loans are included.
Change 2: New minimum credit score established
Old rule: Under the old rules, in order to qualify for an insured mortgage at least one borrower (or their guarantor) needed a minimum credit score of 600, which is only “fair” credit according to standard guidelines.
New rule: The new rules raise the minimum to 680—meaning buyers will need a “good” credit score.
Change 3: No more borrowed down payments
Old rule: In order to make up the minimum down payment, a home-buyer could use unsecured personal loans, unsecured lines of credit and even credit cards. The minimum down-payment is 5% for houses valued up to $500,000, and 10% of the amount over $500,000, up to $1 million.
New rule: Borrowers must provide the down payment “from their own resources,” CMHC says. These can include savings; equity from the sale of a property; a non-repayable financial gift from a relative; funds borrowed from other, liquid financial assets or against other real property; or a government grant.
The “mortgage stress test” will remain unchanged. The stress test requires lenders to confirm that a borrower can still make their monthly mortgage payment even if interest rates rise.
How will this affect you?
The changes to the Debt service ratio could lower your buying power by 10%. For example if you where approved for $400,000 with the new rule changes it would lower your qualification to $360,000.
BUT the good news is the other two mortgage insurers ARE NOT following CMHC changes. If these changes do affect you, you will have to go through either Genworth or Canada Guaranty. Most Lenders will use all three insurers but to be safe, I would contact a mortgage broker has they can bring your file to a large variety of lenders that use the the three different insures and find the best fit for you!
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