In my life I have bought four homes, built one and am now in the midst of a major reno/addition. I can tell you that throughout all this, the complexities and onslaught of acronyms never fails to be daunting and discouraging.
With CMHC, GDS, TDS, credit ratings, seventy different types of mortgages to choose from and more, it all makes you want to throw up your hands and simply leave it to the experts.
I’m here to tell you it is not as scary as you think. A little web-based research can empower you
significantly and make you feel way more comfortable with the decision to buy a home.
If you have ever bought a home or are considering purchasing one, then you likely have read about or dealt with the Canadian Mortgage and Housing Corporation (CMHC). According to Wikipedia “the CMHC was established after World War II, to help returning war veterans find housing. It has since expanded its mandate to assist housing for all Canadians. The organization's primary goals are to provide mortgage liquidity, assist in affordable housing development, and provide unbiased research and advice to the Canadian government, and housing industry.”
The biggest business and core focus of the CMHC, which is a Crown corporation, is mortgage insurance. They insure mortgages where the down payment is less than 20 percent of the purchase cost. CMHC is also the only mortgage insurer of multi-residential properties. Additionally they have broadened their mandate to focus on affordable housing development.
That’s a lot but it is all an extension of its original mandate – to make it easier for people to have access to home ownership.
So, What are the Changes?
Currently, in order to qualify for a mortgage when you have less than a 20 percent down payment,
CMHC requires you to have a credit rating of 600 and gross debt servicing ratio (GDS) and total debt servicing ratio (TDS) of 39 percent and 44 percent respectively (I’ll define these acronyms in a minute - keep reading!). Also, you can borrow money towards your down payment (with certain restrictions).
The new rules that will come into place July 1 raise the minimum credit score to 680 (moving from Fair to Good) and will decrease the GDS and TDS ratios to 35 and 42 percent and, borrowing money toward your down-payment will disqualify you from getting a CMHC mortgage.
What is a credit rating? A credit rating is determined based on your history of debt repayment. This can be a bit of a challenge for newcomers to the housing market or recent immigrants who do not have a history of debt repayment. In Canada credit ratings range from 300 to 900. As a rule of thumb, a rating of 300-599 suggests you need to work on your repayments, perhaps consolidate multiple debts to a single, more manageable loan with a lower interest rate. A rating of between 600-649 is considered Fair; 650-719 is Good; 720-799 is Very Good and 800-900 is Excellent. A higher credit rating gives lending institutions greater faith in your ability to repay and can qualify you for more favourable interest rates.
Banks and other lending institutions have access to your credit rating. I never realized until several
houses into my life that I was able to access my credit report and rating. In fact it is very easy – both www.transunion.ca and www.equifax.ca can provide you with your credit report for a minimal fee.
Having a copy of your credit report informs and empowers you. Once you know your credit rating and calculate your GDS and TDS, you can know what the likelihood is of qualifying for a CMHC mortgage before you ever step foot into a lending institution.
What about the GDS/TDS ratios? How does this change affect me? Let’s start with some definitions:
Gross Debt Service (GDS): The percentage of the borrower’s income that is needed to pay all required monthly housing costs (mortgage payments, property taxes, heat and 50% of condo fees).
Total Debt Service (TDS): The percentage of the borrower’s income that is needed to cover housing
costs (GDS) plus any other monthly obligations that an individual has, such as credit card payments and car payments.
For example – if you have a household income of $75,000 or $6,250 per month and all of your monthly housing costs add up to $2,000 that means you have a GDS of 32 percent. Three percent less than the required maximum according to CMHC.
But what if you have a lot of other debts or a few large ones like a car payment, a boat payment etc. that add another $2,000 to your overall debt making it $4,000 per month in payments? Well that makes your TDS 64 percent which is too high to qualify for a CMHC mortgage according to the rules, which set the maximum TDS at 42 percent.
The Down-Payment: Under the current CMHC rules (in place until July 1) you were allowed to borrow a portion of your down-payment as a smaller, secondary loan to your mortgage. This will no longer be allowed. You will still be able to source your down-payment from savings, investments and gifts from family.
How does this impact me in the real world? Here is example from Ratehub.ca –
“According to the Ratehub.ca mortgage calculator, using the current…GDS limit of 39, a family with an annual income of $100,000 and a 10% down payment would have qualified for a home valued at $524,980. Under the new GDS limit of 35, the same household can now only afford a home of $462,860. This is a decrease in buying power of almost 12%, all due to the change in the GDS limit.”
Why are they doing this?
Simply put CMHC is concerned that people are over-mortgaged in Canada and the market is not
insulated from a change such as defaults on mortgages due to Covid-19 job loss and sudden increased interest rates. These new rules are designed to cool the housing market by making it more difficult for riskier home-buying to occur.
Final Note – CMHC is not the only insurer of mortgages where the down-payment is less than 20
percent. There are private insurers that do this and they have signalled they have no plans to change their qualifying requirements.
None of this means you cannot buy a house if you do not have 20 percent as a down-payment. It simply means you will qualify for a smaller mortgage than before and you may need to manage your debt a little better.