Understanding the CMHC Mortgage Changes
Early last year, as the world woke up to the COVID-19 outbreak, its negative consequences were felt across the globe. To cope with the far-reaching effects of the raging pandemic, several organizations and businesses, big and small, implemented changes to reduce the colossal loss to human life as well as the economy.
Speaking of the financial ramifications, a significant change was declared by the Canada Mortgage and Housing Corporation (CMHC) on June 4, 2020, in response to the pandemic. It announced changes to the eligibility norms for mortgage insurance or rather a tightening of its underwriting criteria. The CMHC mortgage changes came into effect on July 1, 2020.
The move was made apparently in an effort to reduce the overall risk for everyone involved, the government, future homeowners, taxpayers, and of course the housing market. It’s safe to say that these changes were imminent considering that the Canadian economy – much like the economies elsewhere – was and is trying to cope with the uncertainty due to the pandemic.
In this article, we will cover what these CMHC mortgage changes will mean to you over the long term, who qualifies for CMHC mortgage now, the importance of credit when buying a home, how to boost your credit score, and other great tips on how to qualify for a mortgage.
What Are the New CMHC Rules?
With the below mentioned mortgage rule changes, CMHC tightened requirements for homebuyers:
- The credit rating needed to get mortgage insurance went up from 600 to 680 points.
The higher credit score eligibility means that buyers now need to be in the “good” credit rating range to be able to secure mortgage insurance. So for people who’ve struggled to pay their debts in the past, the new credit score requirement will naturally impact their ability to get an insured mortgage. It’s an especially noteworthy point that could have far-reaching implications considering that since the pandemic broke out last year, many individuals have lost their jobs and hence have struggled to pay their bills and debts on time. It’s important to note if applying for a mortgage with a partner, that one applicant’s score out of the two must be 680 or more.
- Although this CMHC mortgage change will not impact the eligibility for an insured mortgage, it can still have profound effects since the CMHC insured mortgages account for a major proportion of home purchases. Moreover, an insured mortgage means you can purchase a home with only a 5% down payment, as opposed to paying 20% of the home price at the outset.
- The Gross Debt Service Ratios will decrease to 35 (from 39%).
This CMHC mortgage change means that as opposed to previously, when debtors could spend 39% of their gross income on housing, now they can spend only 35% of it on home purchase. Considering the loss of income for many workers in the last year, the new rule has only exacerbated the ability of a majority of Canadians to secure insured mortgages.
- Total Debt Service Ratio will decrease to 42 (from 44%).
In light of the CMHC mortgage change, home buyers can now only borrow up to a total of 42% of their income, compared to earlier when they could borrow up to 44% (including all loans) of their gross income. So for a person who has other debts, the amount they can borrow on a home mortgage will automatically reduce.
- Loaned or financed funds will not be acceptable for down payments.
The prohibition on borrowing funds for down payments is another crucial move that may lower an individual’s ability to buy a home. Vis-à-vis the past, when buyers were able to make the minimum down payment required to buy a home by simply borrowing funds, now they’re unable to do that.
As per the CMHC mortgage change, down payments can only come from buyers’ themselves, be it in the form of savings, assistance (non-repayable gift) from family members or relatives, cash or equity obtained from the sale of another property, government grant, or funds gathered or borrowed from liquid assets. It’s a significant limitation given that in the past, buyers typically used unsecured personal loans or credit cards to gather the amount required for down payment.
What Do the CMHC Mortgage Changes Mean for You?
- If you do not meet the criteria outlined above, you may not qualify for an insured mortgage with CMHC after July 1st. That being said, you may still qualify with the mortgage insurer Genworth – as they have indicated they will not follow the CMHC mortgage rule changes in terms of tightening the mortgage insurance eligibility.
- If you’re not sure if you fulfill the criteria, but would like to know, click here to find out the amount of mortgage you qualify for, estimate your mortgage payments, lock in an interest rate.
To those of you who’ve been wondering how to avoid CMHC insurance, please get in touch with one of our experts who will evaluate your financial situation based on which they will be able to offer the right guidance. For those of you who would like to know more about CMHC insurance, Sterling Edmonton discusses some quick facts in the next section.
How Much Does CMHC Add to Mortgage?
A popular question by prospective homeowners is, “How much is CMHC insurance on a mortgage?”. The answer really depends on the loan-to-value proportion. For instance, for a loan-to-value of up to 65%, the standard purchase premium is 0.60%, for up to 75%, it’s 1.70%, and so on. Please refer here for the different loan-to-value ranges and their premiums. So, exactly how much your CMHC mortgage insurance will cost will really depend on the purchase price of your home and the loan-to-value percentage. Additionally provincial sales tax may be applicable.
The Importance of a Credit Score When Buying a Home and how to build up your score quickly.
Banks aren’t going to lend hundreds of thousands of dollars to someone they’re not certain will pay the money back, so they look carefully at credit scores when making their decisions. Including data on how much debt you have, what type of debt you have, and whether or not you pay your bills on time, your credit score offers lenders a quick snapshot of how creditworthy you are.
Your credit score is your golden ticket for getting into the house of your dreams, and it pays to start thinking about your score long before you apply for your first mortgage.
Qualifying for a Mortgage
First off, the bank looks at your score to determine whether they want to loan you money or not. Those with low credit scores will not qualify for mortgages. Cutoff ranges vary from bank to bank, so if you’re turned down by one bank, you still stand a chance of getting a mortgage from another bank. However, you may need to spend a few years building up credit before you can get your mortgage.
Sometimes, your score is low, not because you’ve made a lot of mistakes, but because you don’t have a long history. This is particularly true for those who are new to Canada. We’ll talk more about this later, but it’s possible to build your score relatively quickly.
Determining Your Rate
Perhaps more importantly, the bank uses your credit score to determine the interest rate you pay on your mortgage. Only those with excellent credit will get the low scores that you see advertised. Those with good or average credit may pay one or two percentage points higher than the published rates.
What does this mean for you? It depends a lot on the type of home you’re buying, but the higher the interest rate, the higher the monthly payment. In many cases, the difference between rates offered to people with mediocre credit can mean a payment that’s $100 or more per month. Over time, this results in paying tens of thousands of dollars more in interest.
Most banks have credit ranges that they use to determine the rates. For instance, they might give those with credit scores higher than 800 the best rates; those with scores between 700 and 800 a slightly higher rate; and those with scores between 600 and 700 an even higher rate. Compare your score with the bank’s ranges. If you’re close to the score cutoff for a better rate, you may be able to get a better overall deal if you can boost your credit score by those extra points in just a few months. Alternatively, your score might qualify you for a better rate at a different bank if they use different credit ranges.
When Cash Isn’t King
One thing that confuses a lot of people about credit scores is that it isn’t always best to save up for large purchases. Those who always pay with cash can find that they have a low credit score simply because the credit bureaus don’t have enough information to make a determination of creditworthiness.
If this is why your score is low, you should apply for a new credit card, then use it sparingly, making sure to pay off the entire balance each month. In doing this, you’re showing that you can be responsible with credit without having to pay any money in interest charges.
Boosting Your Score
As you get ready to buy a home, you’ll want to make sure that your credit score is as high as possible. Even if you don’t technically need to improve the score, you need to work hard to make sure that it stays as high as it is.
Two of the most important things to boost your score are making on-time payments and paying down any debt you may have. These things account for more than 50 percent of the data that’s used to determine the score. The faster you’re able to pay down your debt, the bigger the increases you should see in your score. You should also refrain from closing any old accounts, as this can make it seem like you’ve had credit for less time than you really have and decrease your score.
Once your debt is paid down, it’s also very important to keep your credit utilization ratio under 30%. This simply means keeping the amount of debt you have relative to your limits under that amount. So for example, if you have a $1000 limit on your credit card, aim to keep your debt at less than $300. This not only applies to each credit card you own, but also to the combined limits of all your cards.
Your credit score is important when you buy a home, but it isn’t the only factor involved. You need to have the income to prove that you’ll be able to make payments. If you’re not sure where you stand, it’s time to talk to a lender about getting a mortgage pre-approval. You’ll then know what types of rates you can get and how much the bank is willing to lend you for your home.
All in all, remember that regardless of the CMHC mortgage changes, it’s always a good financial practice to maintain a high credit score, keep your debt to a minimum, and save as much as possible for a down payment to lower your total mortgage. That said, especially if you’re keen on applying for an insured mortgage, naturally the CMHC mortgage changes would apply to you meaning that you need to be all the more mindful of the outlined tips to get your finances in order for the long term.