Mortgage insurance and your borrowing capacity
If you have less than 20% down payment (we say your mortgage is high ratio), mortgage loan insurance is mandatory. This insurance protects the lender in the event that you, the borrower, stop making your payments. What you may not know is that in Canada, mortgages can be insured by any of three entities: CMHC, Genworth Canada, or Canada Guaranty. Additionally, both the lender and the insurer must approve your application after your eligibility has been established. To be eligible, any insured mortgage must be tested against the rate posted by the Bank of Canada for a conventional 5-year fixed-rate loan – which has just fallen to 4.94%! Once your eligibility is established,
While a homeowner can’t say which of the three mortgage insurers they prefer, one insures every loan – depending on your bank. It’s important to know what’s going on with them because their policies directly affect you as a landlord. Recently, falling home prices and the crippling economy due to COVID-19 have led to changes in policies on mortgages insured by the Canada Mortgage and Housing Corporation (CMHC).
The announcement made by CMHC on June 4, 2020 concerns new insurance requests for a new mortgage purchase or renewal. Refinancing is not affected. What are the changes, and what are the implications for you or someone you know who is considering buying a home?
- Credit Rating Increase: Before, the minimum credit score was 600. Now at least one borrower must have a rating of at least 680. The change is significant, as 80 points is a huge increase in a scale which only goes from 300 to 900!
- Sources of Down Payment: The options as a source of down payment have changed. Now you can no longer use borrowed money. This excludes amounts obtained by means of a credit card, a line of credit or any loan providing for repayment terms. Your down payment must come from your own savings.
- ABD / ATD Ratios: Maximum Gross Amortization / Total Debt (ABD / ATD) ratios determine how much debt you can have relative to your income. Requirements have been reduced from the previous potential level of 39/44 to a more conservative level of 35/42. Thus, an applicant has a lower borrowing capacity, taking into account his prior debt and the mortgage loan he requests in comparison to his income.
Overall, these changes result in about a 9-13% reduction in the amount you might be eligible for. They will mainly affect first-time home buyers. This is a sharp reduction in borrowing capacity and could be seen as very restrictive as a new policy on eligibility.
Fortunately, there is also good news. These changes were adopted only by CMHC. The other mortgage insurers in Canada, Genworth Canada and Canada Guaranty, have both announced that they do not plan to change their criteria for debt ratios, minimum credit rating and down payments.
More information will follow, and there may still be changes, so anyone who owns or is considering becoming a homeowner should stay in the know, especially if they are going to renew their mortgage or make a purchase soon. .
If you’re about to renew your mortgage or buy your first home and want to maximize your borrowing capacity, contact me. I will be happy to discuss the changes and help you find the mortgage lender that best meets your needs.