While forecasting a collapse in house prices of as much as 19% over the next 12 months, Canada Mortgage and Housing Corporation is tightening the rules for its mortgage insurance.

As of July 1st, applicants will need a bigger credit score, a smaller debt load and more, real money up front for CMHC insured mortgages.  It could be seen as an effort to squelch any growth in demand triggered by improved affordability.

It is important to note that these changes are not Federally mandated and there are two private mortgage insurers available, Genworth and Canada Guarantee, that have not made any changes.  To date Banks and Mortgage Lenders have not made any changes and continue to select the appropriate Insurer for approval.

CMHC is upping its credit score to 680 from 600.  In an effort to reduce the practice of borrowing money for a down payment the agency will no longer treat unsecured personal loans and unsecured lines of credit as equity for insurance purposes.  The maximum gross debt servicing ratio (GDS) is being trimmed to 35%, down from 39%.  The maximum total debt service ratio (TDS) falls to 42% from as high as 44%.

The reduction in debt servicing levels is seen as having the biggest impact on home buyers.  By some calculations a household with an income of $100,000 and a 10% down payment could lose as much as 12% of their purchasing power.

The head of CMHC, Evan Siddall, has made no secret of his concerns about “excessive [housing] demand and unsustainable house price growth.”
“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” Siddall said in a press release.

“These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets,” he said.

Many market watchers are calling the moves excessive and say CMHC’s forecasts are unduly pessimistic.  They worry the new rules will batter the confidence of buyers and sellers, bruise market psychology and hurt the near-term housing outlook.

CMHC did decide to leave the minimum down payment size at 5%, which should keep the pool of potential buyers at about the same level.

First National Financial LP