Putting the Squeeze On!
The Canada Mortgage and Housing Corporation (CMHC) has tightened up lending standards to make it harder for Canadians, especially first-time home buyers, to borrow money for a home purchase.
Starting July 1st, at least one applicant must have a credit score of 680, an increase from the current score of 600.
The Ratio Are Going Up!
The gross and total debt servicing ratio will move to 35% (from 39%) and 42% (from 44%) respectively. The gross debt service (GDS) ratio, also referred to as the housing expense ratio is the proportion of income going towards housing-related debt, while the total debt service (TDS) ratio adds in all other consumer loans such as credit cards and auto loans in the ratio.
About 5% 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.
And 18% of CMHC mortgage applicants who require high-ratio financing have a gross debt ratio of more than 35 percent, according to RBC Economics.
Purchasing Power Going Down!
Those that can still qualify will not be able to afford to buy as much. RateSpy noted individuals earning $60,000 with no other debt and with 5% down will be able to afford approximately 10.9% less home under CMHC’s new rules.
They Stoping the Grandparents!
CMHC is also barring non-traditional sources of down payment or unsecured lines of credit that increase indebtedness. This refers to a practice of someone using an existing line of credit or other lending sources to come up with a down payment.
Does this mean a grandparent who wants to take out a small mortgage on their own property to help finance their grandchild’s down payment is no longer allowed?
When asked, Beverly LePage, account representative with CMHC replied, “The situation you are describing would be gifted funds for a down payment, which continues to be recognized by CMHC as a traditional down payment source by CMHC.”
Purchasing Power Reduced!
CMHC’s changes will effectively reduce homebuyers’ purchasing power by up to 11 percent, according to a report from RateSpy.com.