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Pattie Lovett-Reid: Why CMHC is tightening lending standards
TORONTO -- Concern has been expressed by CMHC that we could see a correction in home prices between 9% and 18% over the next 12 months. This concern has led to the tightening of the rules for offering mortgage insurance effective July 1.
These rules are intended for riskier borrowers who have less than 20% down payment to access CMHC's default mortgage insurance.
But that's not all -- and yet another reason to keep your credit score in good standing -- the minimum credit score of 680 is required instead of the current 600 to qualify for CMHC backing. This shift in the credit score says a lot about your ability and willingness to manage the debt you currently are using and have access to. To keep your credit score at the required limit, make your minimum payments on outstanding debt on time and limit the number of credit facilities you have.
Now to the numbers:
The gross debt servicing ratio will now be 35% of annual income - this includes - mortgage payments, taxes, heating costs and 50% of condo fees. Simply add them up and divide the total by your annual income. This number can't exceed 35% and it was 39% before.
Your gross debt servicing number has gone down, meaning that your mortgages costs will need to be lower and that results in less home being purchased.
I'll give you an example:
According to Ratehub.ca, using the current mortgage qualifying rate of 4.94% and GDS limit of 39, a family with an annual income of $100,000 and a 10% down payment would have qualified for a home valued at $524,980.
Under the new GDS limit of 35, the same household can now only afford a home of $462,860.
This represents a decrease in buying power of almost 12%, due to the change in the GDS limit.
With lower mortgages combine with other outstanding debt you may owe, your total debt service is also reduced to 42% from 44%. That includes your housing expenses plus credit card interest, car payments and loan expenses divided by your annual income.
Both measurements are key barometers for your financial institution when deciding your qualification for a mortgage.
Why the changes now?
The fear is many homeowners may have gotten into the real estate market prematurely with financial vulnerabilities that are now being exposed due to the pandemic.
The dream of owning a home is a goal for many; however, these rules are intended to protect two parties here - the potential homeowner who doesn't have the financial maturity to protect themselves in a period of economic hardship and the taxpayer who is on the hook if they can no longer keep their mortgage in good standing. CMHC is a government-backed program.