Whew!! First time buyers will still be able to purchase a house if their credit score is less than 680
Following the announcement of CMHC’s new mortgage rules last week, Canada’s other two mortgage insurers, Genworth Canada and Canada Guaranty, confirmed Monday they will not be following CMHC’s lead.
“Genworth MI Canada Inc….confirms that it has no plans to change its underwriting policy related to debt service ratio limits, minimum credit score and down payment requirements,” the company said in a release.
Similarly, Canada Guaranty said it “confirms that no changes to underwriting policy are contemplated as a result of recent industry announcements.”
To recap CMHC’s mortgage rule changes, the following will apply to insured mortgages (those with less than 20% down payment) as of July 1, 2020:
- Maximum Gross Debt Service (GDS) ratios will be lowered to 35% (from 39%)
- Maximum Total Debt Service (TDS) ratios will be lowered to 42% (from 44%)
- The minimum credit score needed to qualify will rise to 680 (from 600) for at least one household borrower
- Many non-traditional sources of down payment that “increase indebtedness” will be banned
- It has been confirmed, however, that borrowers will continue to be able to use a loan from their RRSP through the Home Buyers Plan, a home equity line of credit (HELOC) on one of their second properties, or a HELOC on a property owned by their parents if the money is gifted.
“We acknowledge the potential ‘pro-cyclical’ negative impacts on housing markets of CMHC’s decision to tighten underwriting,” CMHC CEO Evan Siddall wrote on Twitter in response to criticism. “However, the benefits of preventing over-borrowing far exceed these costs. Not acting also exposes young families to the tragic prospect of foreclosure.”
Why the Other Insurers Won’t Adopt the New Rules
In explaining its decision, Genworth Canada President and CEO Stuart Levings said the company’s current underwriting policies for insured mortgages already allow it to “prudently” manage its risk exposure.
“Genworth Canada believes that its risk management framework, its dynamic underwriting policies and processes and its ongoing monitoring of conditions and market developments allow it to prudently adjudicate and manage its mortgage insurance exposure,” Levings noted, “including its exposure to this segment of borrowers with lower credit scores or higher debt service ratios.”
Similarly, Canada Guaranty said it has been well-served by its existing underwriting criteria over the years and sees no need to make adjustments now.
“Canada Guaranty utilizes a dynamic underwriting process where our underwriting policies are consistently updated to reflect evolving economic environments and emerging mortgage default patterns,” Mary Putnam, VP, Sales and Marketing of Canada Guaranty, said in a release, adding this has resulted in the lowest loss ratio in the industry.
“Recent insurer announcements relating to down payment and minimum credit score represent a very small component of Canada Guaranty’s business, and we will continue to be prudent in these areas,” she said. “Given implementation of the qualifying stress test and historic default patterns, Canada Guaranty does not anticipate borrower debt service ratios at time of origination to be a significant predictor of mortgage defaults.”
Observers saw the announcements as a positive for borrowers who will continue to have some options in the markets should they not be able to meet CMHC’s stricter qualification standards.
“We like this decision,” noted National Bank of Canada analyst Jaeme Gloyn. “The decision will help soften potential negative impacts to the housing/mortgage market as we argued against tinkering with mortgage underwriting criteria in light of the COVID-driven housing market slowdown.”
NBC had estimated that CMHC’s new rules relating to debt service ratios and credit scores could have impacted up to 20% of CMHC-insured borrowers.
Impact of CMHC’s New Mortgage Rules
So what are the impacts of CMHC’s new rules on borrowers shopping for high-ratio mortgages?
CIBC’s Benjamin Tal estimates the change will mean about 5% of homebuyers will no longer be able to qualify for a mortgage.
For those who can, it will mean a reduction in their buying power.
“Fewer people will qualify for a mortgage, and if they do, the maximum they can borrow will be around 10% or more less than it is right now, ” wrote Ross Taylor, a mortgage agent with Concierge Mortgage Group.
Taylor notes that a household earning $120,000 would currently qualify for a mortgage of around $565,000 plus insurance. With CMHC’s stricter rules, that same household would only qualify for a mortgage of approximately $502,000 plus insurance costs.
“…keeping good credit hygiene is more important than ever if you want to buy a home, especially if you need mortgage insurance,” Taylor adds.