Major announcement from the Canada Mortgage Housing Corporation
- Maximum limits for gross debt service and total debt service ratios (GDS/TDS), will be lowered to 35/42 respectively, down from the current 39/44%.
- Minimum credit score requirement will increase from 600 to 680
- Flex down program is eliminated.
Let’s start with an example:
Jane and John both have decent paying jobs of $60,000 annually, for a combined household income of $120,000/year. They have no other debt except for a car loan payment of $500 per month.
Based on the current rules, this couple would qualify for a purchase of $635,000, with the minimum $38,500 down. When we add in property taxes and heat, the GDS comes in at 38.894% (yes, CMHC will decline if the ratio is even .01% over guidelines). When we add in the $500/month car loan, the TDS comes in at 43.894%.
So both the GDS and TDS are maxed out in this scenario.
Under the new rules, Jane and John will only qualify for a purchase of $560,000, with the minimum $31,000 down. GDS and TDS comes in at 34.835%/39.835% respectively. While the TDS threshold hasn’t been reached, the GDS is up to the maximum. So, Jane and John have seen their buying power decrease by $75,000.
If there already wasn’t enough inventory at $635,000, imagine how this imaginary couple will feel if they can only look at properties up to $560,000.
By lowering the GDS max by 4%, our couple will be priced out of the market, or be limited to purchasing a condo (here in our market in Victoria).
My thoughts on the change:
In my experience, most buyer’s applications, especially those with less than 20% downpayment, are always hovering around maximum debt servicing guidelines. Why? Because incomes in Victoria have not kept up with rising house prices. Even a household income of $120,000 per year won’t qualify you for a house here in Victoria. The higher the house price is, the higher the mortgage requirement, and hence the higher the income (and downpayment) needed to qualify. As our prices continue to rise, more and more people continually get priced out of the market. Either not enough downpayment, not enough income, or both.
This announcement from CMHC deals a major blow to first time homebuyers by further limiting purchasing power, in a market that already seems out of reach for so many. I can’t honestly say I saw this coming. Given how many rule changes there have been over the past 6 years, I was expecting the government to loosen rules at some point, rather than tighten them further. The reaction around the “zoom” water cooler is the same from most- we’re all surprised that the Bank of Canada is going to stifle the market further amidst an already slumping economy.
So why are they doing this? In their statement, CMHC states that due to Covid, they expect price drops from 9% up to 18% in the next year. They state that these changes are being made “in order to protect future homebuyers and reduce risk”, which itself is somewhat of a vague statement. How does this change protect future homebuyers, if those homebuyers can’t even get into the market in the first place? Reduce risk? This change will not greatly reduce the overall risk of the housing bubble, and in actuality, their move may very well bring on the drop in housing prices they are predicting.
This change is not a welcome change. It will put further stress on our system in the short term as we could see a run on housing, forcing prices up temporarily. Once July 1st hits, buyers coming into the market will find it harder to qualify for a mortgage, and find prices higher too. A double whammy. Once the changes take effect, we will see a similar scenario as previous years – those that have 20% down will have a greater advantage when looking for a home, as there will be less competition. Those with 20% down may include existing homeowners who want to buy a rental property or upgrade to a bigger home, or first time buyers with gift money from family. Honestly, there aren’t too many others categorized in the 20% range, as 20% of a home in our market is quite a bit of money, and frankly, too much for any regular person to actually save up over time.
The other changes:
The 2nd change is less impactful, but will have an effect. The credit score requirement is somewhat significant because there are some who have middle of the road credit scores trying to obtain a mortgage. However, most first time buyers who are responsible with credit will have scores well over 700 anyways. Also, lenders, and insurers, were already declining people with lower scores anyways. So even though this change raises the bar, you could say the bar was already raised beforehand, just not officially.
The 3rd change, which is the elimination of the flex down program, is almost irrelevant at this point. The flex down program allowed qualified borrowers to borrow funds off unsecured facilities to make up their minimum downpayment. This program was extremely difficult to qualify for, very risky for those that tried to use it, and frankly, 99% of people out there would not qualify. This was not a program that I recommended to clients simply because the burden of unsecured debt, coupled with a 95% mortgage, would be stifling to anyone.
Some Predictions and Unanswered Questions:
One question that may arise in the next few days, is, will the other two insurers follow suit? Based on history, yes. Genworth and Canada Guaranty have changed their policy to match CMHC policy changes every time. Expect announcements from the two other insurers next week.
The biggest question that comes out of this policy change, is, will the banks follow suit and adjust their policy on conventional mortgages and refinances? Ultimately, I believe we can expect the banks to follow suit on conventional guidelines in the coming weeks. If they left their debt servicing ratios as is, it would create too big a gap between those with the 20% down compared to those without. This massive gap in policy would give a huge advantage to those with 20% down. If we look at one of the previous policy changes on the stress test, the guideline changed for both high ratio and conventional mortgages. Expect the same here.
However, I do expect banks to start making more debt servicing exceptions to those with 20% down, on files that they consider “strong”. Applicants with strong net worth and liquid assets, higher credit scores, and bigger downpayments. As the goalpost is moved on one side of the field, the goalpost will move somewhat on the other side too.
While I believe our government has good intentions, this change was ill advised and not welcome. Homebuyers are already feeling the pinch when qualifying for a mortgage, and this change is just going to make things harder for them. I do not believe this change will bring safety from a market bubble, but rather just exacerbate a system that is already being stifled by tough policies and the economic impacts of Covid-19.