How to get around Canada’s harsh new mortgage rules – Come July 1, 2020, it will be a lot harder to get the feds to back your mortgage.
[Financial Post – June 16, 2020]
The tighter lending rules coming into force July 1 will make it harder for some Canadians to buy homes, but mortgage pros say panicking won’t do you any good.
The Canadian Mortgage and Housing Corporation (CMHC) announced plans in early June to reduce borrowing limits, demand higher credit scores and restrict down payments for anyone who needs default insurance from the agency. That kind of insurance is mandatory for “high-ratio” buyers putting less than 20% down on a home.
While the looming deadline is scary, most buyers would be wise to shop around for the best option, not rush into the first mortgage they see. Here’s why.
Why is this happening?
Evan Siddall, president and CEO of the CMHC, explains the changes are meant to steady the economy in the age of the coronavirus by controlling debt and protecting lenders from people who pose a high risk of defaulting.
While the rules will sting for some people trying to crack their way into the real-estate market, they could be a boon for others. By reducing the number of buyers, the crown corporation hopes to quell demand and balance out home prices.
“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” Siddall explained in a statement.
“These actions will protect homebuyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
What are the new rules?
First, homebuyers seeking a high-ratio mortgage won’t be able to submit a down payment with money borrowed from credit cards, unsecured personal loans or lines of credit. Only “traditional sources” of cash, such as savings, equity from the sale of a house or financial support from relatives, will fly.
Second, the minimum credit score to qualify will jump from 600 to 680. If you don’t know your credit score, you can check it for free online. If it’s too low, you’ll have to take steps to improve it.
Third, borrowers will be capped at spending 35% of their gross income on housing. That includes the mortgage itself, property taxes and utilities. They will also only be able to borrow up to 42% of their gross income, taking into account all of their other loans and credit.
Currently, buyers can spend up to 39% of their gross income and borrow up to 44%. This means potential buyers could see their purchasing power cut by up to 12%.
For example, someone with a $100,000 income buying a single-family home could qualify for a $490,000 mortgage with 5% down before July 1. After that date, their limit will drop to $435,000.
What should homebuyers do?
It’s important to recognize that, if you’re not a risky borrower in the eyes of the CMHC, these changes may not affect you at all.
“They are impacting a subset of borrowers who need mortgage insurance,” says Toronto-based broker Sean Cooper, author of the book Burn Your Mortgage. Even those homebuyers, he says, “still have options.”
You might be tempted to lock in a mortgage pre-approval before July 1, but Cooper says you can’t beat the system that way. An official application for a mortgage has to be submitted to the CMHC in order to fall within its current lending rules.
Instead, homebuyers excluded by these changes should look around for a lender that also works with Genworth or Canada Guaranty, the country’s two private-sector providers of mortgage default insurance. Those companies have decided not to tighten their restrictions.
“They are usually in lockstep with the CMHC, so this is definitely out of the ordinary,” says Cooper.
This rare split means buyers are no longer under the gun. Even if the CMHC thinks you’re a bad bet, you still have the freedom to take your time and choose from a range of lenders that want your business.
Is anyone else affected?
The other good news is that the new lending rules don’t impact homeowners who want to take advantage of today’s historically low rates.
“As of right now, the rules haven’t changed for refinancing,” says Cooper. “The fact that Genworth and Canada Guaranty didn’t match the CMHC’s changes makes me think that there’s less likelihood of more changes in the future.”
Today’s rock-bottom rates are predicted to last for at least 12 to 18 months, until the economy starts to stabilize from COVID-19 crisis.
That means there’s no better time to see how much you can save on interest and your monthly mortgage payments. The opportunity to hold on to more cash is especially welcome while the country’s financial outlook remains uncertain.
Whether you’re buying or refinancing, you can take the time to shop around and get the best deal. Compare rates from more than 30 lenders — including many that don’t need to use the CMHC.
