Thinking of buying a house and plan on borrowing money for a mortgage in the coming months? Next month, you may have a harder time securing a mortgage.
Come July 1, it will be harder for Canadians to qualify for a new mortgage due to changes announced last week by the Canada Mortgage and Housing Corporation (CMHC).
The changes have come about as a result of the COVID-19 pandemic, according to CMHC. The health crisis is affecting all sectors of the Canadian economy, including housing. Job losses, business closures and a drop in immigration are expected to adversely impact Canada’s housing markets.
CMHC foresees a whopping nine per cent to 18 per cent decrease in house prices over the next 12 months due to higher mortgage debt and increased unemployment.
To help reduce the risk and protect future home buyers, the corporation is implementing new changes to it’s underwriting policies for insured mortgages.
The changes will mean that you will have to establish a minimum credit score of 680 for at least one borrower, up from 600. They will also limit gross and total debt servicing ratios to their standards of 35 per cent and 42 per cent, respectively.
Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes, meaning you won’t be able to use a personal, unsecured line of credit as equity.
“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” said Evan Siddall, CEO and president of the CMHC in a release Thursday.
“These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
Meanwhile, the corporation has also suspended refinancing for multi-unit mortgage insurance except when the funds are used for repairs or reinvestment in housing.
Lenders say it’s a wake-up call for those looking for a new mortgage.
“This really forces the consumer to think twice or be more diligent about what is truly affordable and maybe force everybody to take a hard look at what is secure income in the future,” said Evan Yuan, Jubilee branch manager for Island Savings.
“If you feel very secure going into this position, your job is very reliable, then by all means this probably shouldn’t impose that much of a threat to your purchasing capabilities. But, if you are already on the cusp of being able to afford or not afford it, this could be the straw that breaks the camels back,” he said.
If you already have a solid credit rating, the mortgage changes should not be an issue, says Yuan. If you can seek help from a family member to help with a down payment, that can make a significant difference as well.
The biggest challenge will be the debt servicing ratios, which lenders use to determine how much mortgage-buying capabilities a borrower may have.
Yuan notes that if you already have money for a down payment and the housing market does drop over the next year, you will have greater purchasing power and may not be affected by the changes as much.
The decisions to make the changes are within the Canadian Mortgage and Housing Corporation’s authority under the National Housing Act and were done in anticipation of potential house price adjustments. CMHC says it will continue to monitor market conditions and will work with the federal government on potential macro-prudential policy options.