CMHC authorities released new mortgage regulations, which went into effect on 1st July 2020. CMHC requirements have been tightened in these new changes, which seek to discourage high-risk applicants from taking mortgages that they’re unable to afford.
The term ‘high-risk borrowers’ refers to homebuyers whose down payment does not exceed 20% of the property’s mortgage value.
With Canada’s real estate market expected to decline significantly in the new few months, housing prices are expected to fall by 9% – 18% over the next year. Banking and government institutions are taking steps to protect the system from facing mortgage defaults in the future with the latest updates to the mortgage regulations.
NEW MORTGAGE RULES 2020
The following updates have been made to the mortgage rules for 2020:
- Homebuyers are required to have a 680+ credit score. Previously, 600 was enough to qualify for a mortgage. If the house is being purchased by a couple, at least one applicant needs to have a 680 score.
- Gross Debt Ratio or GDS has been limited to a maximum of 35%, compared to 39% earlier. The total debt service ratio or TDS has been capped at 42% as well, compared to 44% earlier. Basically, borrowers need to provide adequate proof that servicing their debt will require a smaller chunk of their overall income.
- Borrowed funds won’t be counted as equity or towards the downpayment amount when mortgage default insurance underwriters evaluate applications.
Although many homebuyers are going to be significantly impacted by these changes, it’s not so bad. Previous reports stating that the down payment amount would be hiked to 10% from 5% were unfounded.
What Impact Are These New Rules Likely to Have?
Increased housing regulations generally have predictable outcomes.
The following effects are likely to be seen:
- Customers turning to credit unions and other lenders who aren’t federally regulated
- Around 18% of all annual mortgage borrowers (approx. 100,000 buyers) might not be able to clear the stress tests
- A slowdown in the housing market, especially in Vancouver, and Toronto.
- More homebuyers turning to cheaper homes and a fall in the number of homebuyers purchasing pricier houses. The new rules also limit the mortgage amount that new homebuyers can qualify for.
- 40000 – 50000 prospective buyers might not be able to purchase a new home due to the latest regulations
- 50000 – 60000 prospective buyers will not be able to purchase the houses they were initially eyeing. They will need to go for cheaper options.
The national mortgage broker industry association in Canada has been requesting the government to relax the rules so as to stimulate more demand in the real estate market. Based on the stats given in this report, many of their arguments seem completely justified. However, it’s impossible to accurately predict what direction Canada’s real estate market might take in the next few months due to the unprecedented nature of the situation that the country is facing right now. More time is needed before something concrete can be said about the Canadian housing market.
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