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CMHC tightens mortgage lending

June 9, 2020

Canada’s largest mortgage insurance provider unveiled stricter underwriting policies for homebuyers on June 4.
The measures from Canada Mortgage and Housing Corp. (CMHC) include limiting the gross debt service ratios on home buyer loans to 35 per cent from 39 per cent, and limiting the total debt service ratio to 42 per cent from 45 per cent.
One major change raises the minimum credit score for a potential borrower to 680 from 600—likely removing a number of first-time buyers from the market.
CMHC has also banned non-traditional sources of a down payment that “increase indebtedness.” This refers to the practice of someone using private loans, or other lending sources, to come up with the down payment.
“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic future of Canadians,” said CMHC CEO Evan Siddall in a statement.
“These actions will protect homebuyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
In a controversial outlook released in May, CMHC said it expects a 9 to 18 per cent decrease in house prices over the next 12 months.
CMHC’s changes will effectively reduce homebuyers’ purchasing power by up to 11 per cent, according to report from RateSpy.com.
“Someone earning $60,000 with no other debt and 5 per cent down could afford approximately 10.9 per cent less home under CMHC’s new rules,” RateSpy noted.
About 18 per cent of CMHC mortgage applicants who require high-ratio financing have gross debt ratio of more than 35 per cent, according to RBC Economics. Approximately 5 per cent of CMHC loan insurance applicants have a credit score of less than the new level of 680, according to data from the Mortgage Professionals of Canada.
CMHC said greater mortgage scrutiny is needed because the pandemic is “adversely impacting Canada’s housing markets” through job losses, business closures and lower immigration. 
Private mortgage insurers Canada Guaranty and Genworth Canada have not yet changed underwriting policies to match that of CMHC.

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