The Canadian Mortgage and Housing Corporation is a Crown Corporation with a mandate to make housing affordable for all Canadians. Anyone looking for a home in Victoria knows they have a way to go with this aspiration but, hey, you can’t fault them for trying.
One of the ways CMHC assists homebuyers is through the provision of mortgage loan insurance, which is required for anyone purchasing a home with a down payment of less than 20%. This insurance protects lenders from mortgage defaults. So, really, when you think about it, the CMHC is really helping lenders, not homebuyers. But, presumably, without the insurance many people wouldn’t get a loan at all, so don’t bite that hand, buyer!
On June 4th, CMHC announced that it was changing the guidelines for high ratio mortgages. Effective July 1,
- the maximum gross debt service ratio (GDS - housing expenses divided by income) will be lowered from 39% to 35%
- the maximum total debt service ratio (TDS - housing expenses plus other debt divided by income) will be lowered to 42% from 44%
- at least one borrower must have a credit score of 680, up from 600
- many down payment sources that increase debt (i.e. borrowed down payments) will be banned
These changes reduce the purchasing power of home buyers by 10-12%. For example, under the old rules, a household with an annual income of $120,000 would be eligible for a $565,000 mortgage. Under the new regime, that same household would only qualify for a loan of $502,000.
Why has CMHC decided to further crush the dreams of aspiring homebuyers, especially Millennials who already feel excluded from the wealth & security party? CMHC says they’re worried that household debt, already at eye-watering levels, will explode in the wake of the COVID-19 crisis. According to Evan Siddall, CMHC President & CEO, the new guidelines “will protect homebuyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
Fair enough. However, CMHC isn’t the only game in town, mortgage-insurance-wise. Two private companies, Genworth and Canada Guaranty, also provide mortgage insurance to Canadians, and have so far declined to follow the lead of CMHC. And if the bearish predictions of CMHC - that housing prices will drop 9-18% over the next year - prove true, the reduced buying power should be at least partially offset. However, prices in Victoria have so far shown no signs of dropping, and the future, dear friends, remains unclear.