The government-backed Canada Mortgage and Housing Corp (CMHC) announced stricter lending standards to protect the economic future of Canadians and minimize long-standing vulnerabilities in our financial market.
As of July 1st the following mortgage rule changes will apply to insured mortgages (those with less than 20% down payment):
New minimum credit score established. At least one borrower (or their guarantor) needs a minimum credit score of 680 – meaning buyers will need a “good” credit score, raised from 600 which is only “fair”.
Less debt as a percentage of gross and total income. The gross debt service (GDS) ratio will drop to 35 per cent and the maximum total debt service (TDS) ratio will be lowered to 42 per cent. Under old rules, buyers could spend up to 39 per cent of their gross income on housing (including their mortgage, property tax, heating bill and half of condo fees) and borrow up to 44 per cent of gross income once credit card, car payments and other loans are included.
No more borrowed down payments. Borrowers must provide the down payment from their own resources; for example, savings, equity from the sale of a property, a non-repayable financial gift from a relative, funds borrowed from other liquid financial assets or against other real property, or a government grant. “Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity”, says CMHC. These include unsecured personal loans, unsecured lines of credit and even credit cards.
Thus far, Canada’s other two mortgage insurers, Genworth and Canada Guaranty have indicated that they will not be following CMHC’s lead. Because both are private lenders, they are not required to adopt the CMHC rule changes.