Breakdown of the upcoming rule changes
CMHC offers mortgage insurance for homebuyers whose down payment is less than 20%. Starting on July 1, 2020, we can expect to see these revised mortgage insurance requirements from CMHC:
- Increased minimum credit score of 680 from at least one borrower. The former minimum was 600.
- Reduced Gross and Total Debt Servicing (GDS/TDS) ratios to 35 for GDS and 42 for TDS (formerly 39 and 44 respectively).
- Non-traditional sources of down payment that increase debt (e.g. unsecured credit or loans) will not be treated as equity for insurance purposes.
- Suspended refinancing for multi-unit mortgage, unless the money is being used for repairs or reinvestment in housing.
Why do these changes matter?
Not much will change if you already have an existing mortgage. But the new rules will have a significant impact on those of us who are potential homebuyers interested in obtaining a new mortgage. Most Canadians rely on savings and investments for their down payment, so the fact that loans are no longer accepted will only be a problem for a small minority of potential homebuyers; the bigger concerns are changes to credit score requirements and GDS/TDS. While the changes may seem minor, they can easily make buying a home impractical for many Canadians right now.
When it comes to credit scores, the new adjustment has essentially bumped the score requirement up a category or two. A score of 600 is generally considered below average while a score of 680 is considered above average. Everyone’s credit profile is different, and some may be able to increase their score by 80 points or more in a matter of months; for others it could take longer.
As for the debt ratios, consider this example: Say you make $65,000 per year, and the home you want to buy will have combined mortgage and property tax payments totaling $21,000 per year. Aside from that, you also have car payments that are $7,000 per year. In this case, your GDS would be 32 and your TDS would be 43. With the old ratios, you could be pretty confident that you would be approved under both metrics. However, with the new ratios, your GDS is still ok but your TDS is too high. In this scenario you wouldn’t qualify.
The general consensus is that these changes mean families are losing about 11% in purchasing power. That’s a tough blow considering many Canadians, especially the millennial generation, are already struggling with home affordability.
How can I get ahead?
In a nutshell: You now need a better credit score and more money to qualify for the home you want. Increasing your credit score is likely the easier of those two feats, and you can start by checking your credit score to see if it needs to improve and by how much. If your score is below 680 or right on the bubble, I suggest reviewing our top guidelines for increasing your credit score to see which steps you should take.
As for reducing your GDS and TDS, you should carefully consider the below strategies for increasing your income and/or paying off your debt.
Tips for increasing your income
It might be worthwhile to request a pay raise at your primary source of employment. If you’re unsure how to navigate the conversation with your employer, I highly recommend that you take some tips from this article.
If a raise from your primary source of employment seems unrealistic in this economy (and it very well might be), you might instead look at getting a second job or starting a side-hustle that will allow you to bring in some extra dough. You could also rent out part of your home if you have a spare room available.
Tips for reducing your debt
Focusing your time and energy toward reducing your debt can actually be more financially shrewd than trying to increase your income, because debt carries the added expense of interest payments.
Budget, budget, budget
Creating a budget is step one for reaching any financial goal, including slashing your debt. If you already have a budget, it might be time to make some edits, as there could be expenses that you can cut out or fees you’re paying for services that are no longer important to you. Budgeting is something that you can do independently, or you can turn to one of the many budgeting apps out there to help you get a better idea of where your money is going and where you can cut corners. One of my favourite budgeting apps is PocketSmith, which lets you set weekly or monthly limits for your spending categories and has a ‘forecast’ feature that shows you how long it will take you to pay off your debt if you stick to your budget.
Prioritize wisely
If you have multiple sources of debt, focus on first paying off whichever debt source has the highest interest rate. Credit card balances are usually subject to very high interest rates, and are therefore among the most expensive kinds of debt to carry.
If you consistently roll a credit card balance from one month to the next, consider reducing your interest rate by taking advantage of a balance transfer promotion. Some balance transfer credit cards have no annual fee (or a minimal annual fee) and a very low interest rate for a promotional period of 6-10 months, which will allow you to play catch-up on paying off the credit card debt without taking huge hits from interest.
You can also consolidate different sources of debt under one low interest rate by taking out a personal loan, but the rate you get for a loan will likely not be as low as the rate available for a balance transfer card promotion.
For more ideas on how to reduce debt, take a look at this get out of debt guide.
Are these changes going to be part of our ‘new normal’?
While CMHC has experienced backlash over these changes, the fear of a potential housing market crash is understandable given the current financial climate. Though these more stringent standards are not ideal for some individuals looking to purchase a home right now, keep in mind that CMHC is monitoring the market and if things pick up again, these requirements may change. In the meantime, if you are worried about qualifying it’s probably best to hold off on purchasing a home for a little while longer and instead focus on increasing your credit score and income and reducing your debt load as much as possible.
FAQs
Do I need mortgage insurance?
It depends on your down payment and the price of the property you are buying. If you are able to put a down payment of 20% or more on the property, and the home price is less than $1M, then you are not required to get mortgage insurance.
Are there mortgage insurers other than CMHC?
Yes. CMHC is undoubtedly the best known and most used mortgage insurer in Canada, but there are other Canadian companies who also provide this service (e.g. Genworth and Canada Guaranty), and they are not subject to the same stringent requirements held by CMHC. However, you can expect to pay a higher premium to private insurers.
Should I wait to buy a home given these changes?
If you are relying on CMHC for mortgage insurance, then the new changes may outprice you from the home you had originally planned to buy. Plus, if you are on the bubble to meet their new requirements there is no guarantee you will be approved, so it might be worth waiting to see how things play out.
