Canada Mortgage and Housing Corp. is toughening up its rules to make it harder to get mortgage insurance, a move that would reduce demand from riskier borrowers and keep prices in check at a time of economic uncertainty.
The national mortgage insurance provider will ban the use of borrowed funds for a down payment, require a higher credit score from borrowers and try to ensure that homeowners have enough income to pay their mortgages and other debts.
The new criteria, effective July 1, are designed to help weed out borrowers who are less likely to make their payments and could reduce demand for homes at a time when real estate sales have dropped. The changes will affect first-time home buyers, economists say.
It is not possible to determine how many potential home buyers will be affected by the new criteria. But according to CMHC’s latest quarterly results, nearly one in five of its insured mortgage holders would not have met at least one of its new requirements.
Household debt was already at a record high before COVID-19 devastated the economy in March and triggered more than three million job losses and an unprecedented amount of financial aid from Ottawa.
“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” CMHC chief executive Evan Siddall said in a statement accompanying the new rules. “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,” he said.
Before the pandemic, housing markets in Toronto, Vancouver, Ottawa, Montreal and Southern Ontario were overheating with competition driving up home prices. Now, activity is weak. The most recent national data show sales from March to April falling nearly 60 per cent and the average selling price across all types of residential properties down 10.9 per cent, though prices have remained elevated in the most expensive cities of Toronto and Vancouver.
Banks have provided mortgage deferrals of up to six months for about 15 per cent of their residential loan portfolio. CMHC has forecast that home prices could drop as much as 18 per cent over the next 12 months.
The stricter requirements apply only to CMHC insurance, which is required if a home buyer’s down payment is less than 20 per cent. Borrowers can still get insurance from private companies such as Genworth MI Canada Inc. and Canada Guaranty Mortgage Insurance Co., but typically it costs more than CMHC’s insurance. If those private insurers choose not to match CMHC’s new criteria, however, it could drive more business to them.
Under the new rules, CMHC will no longer allow home buyers to borrow funds for their down payment. A borrower will need a credit score of at least 680 instead of 600.
The housing agency is also taking a harder line when looking at borrowers’ expenses relative to their income. This is measured two ways: The gross debt service ratio, or the share of monthly household income used to pay the mortgage and other housing costs, and the total debt service ratio, or the share of monthly income used to cover all housing costs, credit cards, lines of credit and other loans.
Borrowers’ gross debt ratio must be no greater than 35 per cent and their total debt service ratio must be no greater than 42 per cent. Previously, those were guidelines and a borrower could exceed those thresholds to a maximum of 39 and 44, respectively. As of next month, that will no longer be allowed.
“The purpose of this is to eliminate demand that is viewed as too risky," said Benjamin Tal, deputy chief economist with CIBC. "It is consistent with the way CMHC is viewing the housing market at the moment. They are trying to eliminate risk.”
He said that the changes will have an impact on first-time home buyers.
“A large segment that will be affected will be first time home buyers because they have not had enough time to build up a high credit score.”
Douglas Porter, chief economist with BMO, said there were so many cross-currents hitting the housing market at the moment, that it was nearly impossible to quantify the impact from CMHC’s changes.
“At the margin, it will throw some sand in the gears, and act at least as a minor hand brake on the sector as it begins to reopen again,” he said. “Its biggest impact would be on markets where borrowers are stretching the furthest, clearly Vancouver and Toronto,” he said.
Mr. Siddall said two weeks ago his agency was considering changing its underwriting policies. He warned that the combination of household debt, falling home prices and increased unemployment was a concern for the country’s longer-term financial stability. At the time, he appeared to suggest that CMHC could raise the minimum down payment from 5 per cent to 10 per cent.
But CMHC did not change the minimum down payment rules. Mr. Tal said a 10-per-cent down payment would have a much bigger impact on housing demand than the new criteria CMHC unveiled on Thursday.
Separately, the biggest lenders have already started tightening their lending standards. Bank of Nova Scotia is not allowing investors to use borrowed funds for a down payment on rental properties. Other lenders are spending more time verifying income.
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Rachelle Younglai
James Bradshaw