Recently Evan Siddall, the president and CEO of Canada Mortgage and Housing Corp. (CMHC) considered raising the minimum down payment on an insured mortgage to 10 per cent from the current five per cent.
However that plan didn’t feature in CMHC’s new mortgage underwriting rules which was released this week.
However, any mortgage with less than 20 per cent down requires insurance, and to qualify for that insurance, borrowers will need to have a lower debt load than they used to.
Under the new rules, the percentage of income a household spends on housing costs, including the mortgage, can be no more than 35 per cent, down from 39 per cent under the current rules. The maximum share of income spent on all debt payments drops to 42 per cent, from 44.
This in itself will end up reducing the maximum purchase price for first-time homebuyers by up to 12 per cent.
A household with $100,000 in income and a 10-per-cent down payment can currently afford a house of $524,980, but would have a maximum purchase price of $462,860 under the new rules.
That has some criticizing CMHC for picking what they say is a bad time to tighten lending standards.
According to one expert, up to 5 per cent of home buyers will not be able to qualify for a mortgage. Another one per cent will be affected by another rule change: CMHC is raising the minimum credit score for an insured mortgage to 680, from 600.
One other change ― effectively barring people from borrowing money for the down payment ― isn’t expected to have much impact. Home buyers more often get cash gifts from family than loans, and rules around private loans can be hard to enforce.
But in the short term, Canada could see a rush of home buying in June, ahead of the July 1 implementation date ― what the economists called a “pull-forward of activity.”
Canadians who don’t qualify for mortgage insurance at CMHC could still turn to the two private mortgage insurers in Canada ― Canada Guaranty and Genworth Financial. However, only CMHC insures mortgages for homes in multi-unit buildings.
He added that as many as one in five Canadian mortgages could be in deferral by this fall.
With so much in unpaid loans, Canadians’ debt burden will soar well past its previous highs, Siddall predicted. Canadians could owe as much as $2.30 of debt for every dollar of disposable income by the end of this year. The previous high, set a few years ago, was $1.78.