CMHC’s New Debt Ratio Policy To Cut Homebuyers’ Purchasing Power By Up To 11%, Says RateSpy

A website that tracks developments in the mortgage market has published surprising findings about a new policy announced by the Canada Mortgage and Housing Corporation.

On Thursday, the federal housing agency said it expects housing prices in Canada to drop 9 to 18% over the next year.

As a result, CMHC will be changing its underwriting policies for insured mortgages effective July 1.

Among the new measures, a mortgage borrower must establish a minimum score of 680. In addition, non-traditional sources of down payment that increase debt will not be treated as equity for mortgage insurance purposes.

New applicants will need a gross-to-total debt service ratio of 35/42. (The GDS ratio measures the percentage of income to pay off all monthly housing costs. The TDS ratio includes all of this, plus other debt securities, as a percentage of income.)

According to the website, these new rules will reduce the purchasing power of homebuyers by up to 11%.

“For example, someone earning $ 60,000 with no further debt and 5% less could afford about 10.9% less for their home under the new CMHC rules,” the website says. “It’s like dropping the minimum stress test rate from 4.94% (where it stands today) to 6.30%!”

He notes that insured borrowers only make up about 20 percent of new mortgages. This is because lenders require mortgage insurance if the down payment is less than 20% of the purchase price. also suggests that CMHC could lose 20 percent of its mortgage insurance business due to the policy change.

“Liquidity is key if home values ​​plunge,” the website says. “Yet CMHC’s decision today could shift more of its business outside of large urban areas and to less urban and less liquid real estate markets.

“This is because borrowers in Greater Toronto and Vancouver typically have higher debt ratios⁠ and borrowers with higher debt ratios and less than 20% down payments would choose Canada Guaranty or Genworth by default. , because these are the only games left in town. “

CMHC has also suspended the refinancing of mortgage loan insurance for multi-family housing, except when these funds are used to repair the building or to reinvest in the housing.

“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic future of Canadians,” CMHC President and CEO Evan Siddall said on June 4 . “These measures will protect homebuyers, reduce government and taxpayer risk, and support stable housing markets while reducing excess demand and unsustainable growth in house prices.” “

Last month, Siddall tweeted that he saw the value in doubling the minimum down payments in Canada from 5% to 10%.

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