When purchasing a home, first time home buyers have a lot of requirements to worry about. Qualifying for mortgage default insurance wasn’t quite one of them. However, as of July 1, 2020, it may be.
To qualify for mortgage default insurance, a home buyer has to meet a few conditions:
- Maximum amortization for insured mortgages is 25 years
- If the purchase price is between $500,000 – $999,999 a higher downpayment is required (higher than the standard 5%)
- The minimum downpayment is 5% of the first $500,000, and 10% of the remaining amount
- Mortgage default insurance is not available on homes purchased for more than $1 million; this means that a 20% downpayment is required on these homes.
The Canada Mortgage and Housing Corporation (CMHC) has announced that the following changes will apply to insured mortgages (those with less than 20% downpayment) as of July 1, 2020:
- Maximum Gross Debt Service (GDS) ratios will be lowered from 39% to 35%
- Maximum Total Debt Service (TDS) ratios will be lowered from 44% to 42%
- The minimum credit score needed to qualify will rise from 600 to 680 for at least one household borrower
- Many non-traditional sources of downpayment that “increase indebtedness” will be banned
- It has been confirmed, however, that borrowers will continue to be able to use a loan from their RRSP through the Home Buyers Plan, a home equity line of credit (HELOC) on one of their second properties, or a HELOC on a property owned by their parents if the money is gifted
Given these changes, many first-time home buyers got worried about their ability to purchase a home and with good reason. It is estimated the changes would impact up to 20% of CMHC-insured borrowers. Once the changes take effect, fewer people may qualify for a mortgage and, even if they do, the maximum amount they can borrow is estimated to be around 10% or more less than what te same household would have prior to the stricter rules.
Is all hope lost? Not quite.
It may come as a surprise that there are actually three mortgage default insurance providers in Canada: the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial and Canada Guaranty.
On June 8, 2020, Genworth Canada and Canada Guaranty, confirmed they will not be following CMHC’s lead and will not implement any changes.
Not only first-time home buyers have choices when selecting their mortgage default insurance provider but also it is great to know that the same rates are charged by all three players.