Canadian real estate has been a tough nut to crack for some homebuyers, but those have less than 20 per cent as a down payment are about to face another challenge.
The Canada Mortgage and Housing Corporation (CMHC) have recently tightened the qualification rules for borrowers of high-ratio mortgages. The reason behind this is majorly due to COVID-19. As you know COVID-19 has been affecting the real estate markets, and this has left many Canadians vulnerable, with these new changes there will be lower debt thresholds, and higher credit ratings, these changes take effect tomorrow on Canada day, July 1, 2020.
Now you may be wondering what these new qualification rules actually are, and we will provide them here:
If you have less than 20 per cent to pay down, CMHC will now be:
- limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to its standard requirements of 35% (from 39%) and 42% (from 44%), respectively;
- establishing a minimum credit score of 680 (from 600 previously) for at least one borrower; and
- no longer treating non-traditional sources of down payment that increase indebtedness, as equity for insurance purposes.
However, you may be unaware of what a High-Ratio Mortage actually is, and here is a brief explanation.
In order to purchase real estate in Canada, and qualify for a mortgage, buyers must have a minimum down payment of five per cent of the home's total purchase price. However, if you are buying a home and you pay less than 20 per cent of the home's total price in the down payment, you must take out a high-ratio mortgage, which requires mortgage default insurance. This is designed to protect the lender in case of a mortgage payment default by the borrower. Insurance premiums can either be paid upfront or added to the mortgage payments. Due to the changes in Mortgages it has quite frankly impacted the Canadian Real Estate market.
In the past, when there was news of changes coming to the mortgage qualifications, it began an influx of activity that led up to the deadline, as homebuyers were trying to get under the wire. This is exactly what happened before the OSFI mortgage stress test on high-ratio mortgages took effect in October 2016. The mortgage stress test was then expanded to all mortgages on January 1, 2018. Prior to these changes and others, transactions increased.
If you were wondering how much it affected the real estate market, in November 2017, the Canadian Real Estate Association (CREA) reported that Canadian home sales in the month were up 3.9 per cent month-over-month. Then the next month in December there was another 4.5 per cent rise.
However, we most likely will not be seeing the same thing happen this time around.
CMHC is one of Canada's mortgage insurers. CMHC also has two private-sector counterparts, Genworth Financial and Canada Guaranty Mortgage Insurance Co. However these two other companies have confirmed that they will not be following suit. This means that homebuyers with a down payment of less than 20-per-cent will still be able to get a mortgage at historically low-interest rates.
“I think this time it’ll be a little bit less of a frenzy,” says C.A., Executive Vice President and Regional Director, RE/MAX of Ontario-Atlantic Canada. “Typically, when CMHC changes their requirements, the other insurers follow suit. This time they didn’t, so I think this is going to create better balance heading into the summer.”
Currently, in Canada the housing supply is decreasing along with rising prices in Canadian Housing Markets.
C.A. also says that although RE/MAX is supporting the CMHC's decision, C.A. says that it is only a temporary solution to what is a bigger issue. Currently, there is not enough housing supply to meet demands. C.A. points out that major hubs such as Toronto, Vancouver, and Montreal will continue to be challenged to keep pace with demand in the foreseeable future. According to C.A., this is particularly due to the fact that the Canadian government is attracting and promoting more immigration in order to help support the economy. “This is a great thing, but all of those people are going to need a place to live.”
According to C.A., in an interview with BNN Bloomberg, “If we don’t find a long-term strategy that will bridge the gap between supply and demand, we are going to continue seeing price appreciation and continued affordability issues in the foreseeable future.”
If you would like to learn more about Canadian real estate, and new mortgage rules, or if you are thinking about buying or selling your properties, please contact Matt Gul, who is a top luxury real estate agent situated in West Vancouver, who can help you with all of your needs. To contact Matt Gul please call him at 778.888.8888 or email him at firstname.lastname@example.org
Summarized by: Onur Gul on Instagram at @onurgulfilm