Real Estate

CMHC's new debt-ratio policy will cut homebuyers' purchasing power by up to 11 percent, according to RateSpy

by Charlie Smith on June 6th, 2020 at 10:45 AM
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      A website that tracks changes in the home-lending market has issued some startling conclusions about a new policy announced by the Canada Mortgage and Housing Corporation.

      On Thursday, the federally owned housing agency declared that it's expecting a nine to 18 percent decrease in housing prices in Canada over the next year.

      As a result, CMHC will change its underwriting policies for insured mortgages, as of July 1.

      Among the new measures, one borrower on a mortgage must establish a minimum score of 680. In addition, nontraditional sources for a down payment that boost indebtedness won't be treated as equity for the purposes of mortgage insurance.

      New applicants will require a Gross/Total Debt Servicing ratio of 35/42. (The GDS ratio measures percentage of income to pay off all monthly housing costs. The TDS ratio includes all of this, plus other debt obligations, as a percentage of income.)

      According to the RateSpy.com website, these new rules will curtail homebuyers' purchasing power by up to 11 percent.

      "For example, someone earning $60,000 with no other debt and 5% down could afford approximately 10.9% less home under CMHC’s new rules," the website states. "That’s like jacking up the minimum stress test rate from 4.94% (where it lies today) to 6.30%!"

      It notes that insured borrowers only account for about 20 percent of new mortgages. That's because lenders require mortgage insurance if the down payment is less than 20 percent of the purchase price.

      RateSpy.com also suggests that CMHC could lose 20 percent of its mortgage-insurance business as a result of the policy change.

      "Liquidity is key if home values dive," the website states. "Yet, CMHC’s decision today may shift more of its business outside of big urban areas and into less urban and less liquid real estate markets.

      "That’s because borrowers in Greater Toronto and Vancouver generally have higher debt ratios⁠—and borrowers with higher debt ratios and less than 20% down payments would choose Canada Guaranty or Genworth by default, since they’re the only games left in town."

      CMHC has also suspended refinancing for multi-unit mortgage insurance except when these funds are being used to repair the building or for reinvestment in housing.

      “COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” CMHC president and CEO Evan Siddall said on June 4. “These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”

      Last month, Siddall tweeted that he saw merit in doubling minimum down payments in Canada from five to 10 percent.

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