What do the new CMHC rules mean for homebuyers?

The changes, which come into effect July 1, will reduce the purchasing power of homebuyers who opt for CMHC insurance and likely leave insured mortgage applicants in pricey markets with fewer options, according to mortgage brokers.

CMHC’s new debt-ratio policy will lower homebuyers’ purchasing power by up to 11 per cent, according to Robert McLister, founder of rates comparisons site RateSpy.com.

For example, someone making $60,000 a year with a five per cent down payment and no pre-existing debt would be able to afford a home with a maximum home price that is roughly 11 per cent lower than what they would have been able to buy before the new rules, according to McLister’s calculations.

CMHC said it will require a credit score of at least 680, up from the current minimum of 600. It will also lower the maximum amount of debt applicants are allowed to carry compared to their income.

To measure the latter, lenders use two key metrics: the gross debt service ratio (GDS), or the share of income used to cover the mortgage and other housing costs like property taxes, and the total debt service ratio (TDS), the share of income used to cover housing costs plus the cost of servicing other debts.

CMHC is lowering the maximum GDS from 39 per cent to 35 per cent and the maximum TDS from 44 per cent to 42 per cent.

Changes to the GDS threshold and the credit score minimum will have the greatest impact on affordability, said James Laird, co-founder of financial products comparisons site Ratehub.ca and president of mortgage brokerage CanWise Financial, in a statement via email.

Banning the use of borrowed funds to finance down payments will likely have a more marginal effect, as most Canadians rely on savings, investments and financial help from family for down payments, Laird added.

Mortgage insurance, which protects lenders from the risk of borrowers defaulting on their payments, is mandatory in Canada for loans with a down payment of less than 20 per cent.

Mortgage default insurance is available from CMHC as well as private companies such as Genworth MI Canada Inc. and Canada Guaranty Mortgage Insurance Co.

While the new CMHC rules do not apply to Canada’s private mortgage insurers, they could adopt the new policy on a voluntary basis.

Private mortgage insurance providers could become “the only games left in town” for homebuyers in expensive markets like Toronto and Vancouver, where borrowers generally have higher debt ratios, McLister noted.⁠

McLister is critical of CMHC’s decision to tighten the rules at a time when the economy is already reeling from the impact of the COVID-19 public health restrictions.

“Normally, you don’t rock the boat when you’re already taking on water,” McLister wrote in a blog post shortly after the policy announcement. “But that’s what CMHC has done,” he added.

Canada’s housing agency has said it’s concerned that already high household debt levels will soar in the aftermath of the COVID-19 crisis, increasing the risk that overstretched homeowners won’t be able to keep up with their mortgage payments.

The new rules “will protect homebuyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth,” said CMHC head Evan Siddall in a statement.