CMHC Reverses Changes Made to Mortgage Underwriting Practices

Ontario Mortgage News Update: CMHC Reverses Changes Made to Mortgage Underwriting Practices

Ottawa, July 5, 2021

The Canadian Mortgage and Housing Corporation (CMHC) has announced it is reversing course from its decision last year to tighten its underwriting practices for mortgage loan insurance.

Effective July 5, 2021, CMHC is returning to pre-July 2020 underwriting practices, specifically:

• CMHC will consider a Gross Debt Service (GDS) ratio up to 39% and Total Debt Service (TDS) ratio up to 44% for borrowers who have a strong history of managing their payment obligations.
• At least one borrower (or guarantor) must have a credit score that is greater than or equal to 600 at the time of the request for insurance.
• As always, CMHC will consider the overall strength of the mortgage loan insurance application, including alternative methods of establishing creditworthiness for borrowers without a credit history.

What The CMHC Mortgage Changes Mean For Your Home Buying Plans In 2021/2022?

Thinking about buying a new home purchase in a new home community? The new CHMC Mortgage Changes might make that purchase harder!  However, there are still ways to buy despite these rule changes. Read on!

Keeping up with all the changes in the Canadian mortgage market is tough! Every year, there are new rule changes that make life more challenging for buyers. If the pandemic hasn’t made life difficult enough, you now have to contend with CMHC rule changes that make borrowing much more difficult for some.

First, Do You Even Need Mortgage Insurance To Buy Real Estate?

While many people were upset about the changes, it is worth taking a step back to see if these rules apply to you. From a lender point of view, there are two kinds of mortgages: insured and uninsured. An uninsured mortgage means you don’t have to worry about CMHC rules. If your down payment is over 20% of the purchase price, then you can probably ignore CMHC requirements. In contrast, by leveraging CMHC insurance, you can buy a $500,000 home for just $25,000 (i.e., a 5% down payment).

Since CMHC insures billions of dollars worth of mortgages, it is worth taking a closer look at their requirements

Economic Response to Uncertainty Caused by the Pandemic

In response to the economic uncertainty caused by the pandemic, CMHC had unilaterally implemented stricter changes to its underwriting practices for mortgage loans back in July 2020.

This move would was not received well by the industry. As a result, it was not reciprocated by competitive private insurers, which led CMHC reverting back to their previous practices as they recognized that the tighter rules were not as effective and the company would lose market share. (Source: Toronto Real Estate Board )

CMHC Reviews Ontario Mortgage Underwriting Criteria

Last year, in response to the economic uncertainty driven by the COVID-19 pandemic, CMHC unilaterally implemented temporary changes to its underwriting practices for mortgage loan insurance. We felt these changes would protect homebuyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable price growth.

The Key Mortgage Insurance Changes

Effective July 5, 2021, we are returning to our pre-July 2020 underwriting practices for homeowner mortgage loan insurance, specifically:

1) Firstly, Debt as a percentage of income. There are two aspects to this rule.

• CMHC will consider a Gross Debt Service (GDS) ratio up to 39% and Total Debt Service (TDS) ratio up to 44% for borrowers who have a strong history of managing their payment obligations.

2) Secondly, The minimum credit score required for CMHC has gone down

• At least one borrower (or guarantor) must have a credit score that is greater than or equal to 600 at the time of the request for insurance. (previously the min credit score was 680)
• As always, CMHC will consider the overall strength of the mortgage loan insurance application, including alternative methods of establishing creditworthiness for borrowers without a credit history.

While CHMC are making these changes, they will continue to apply rigorous underwriting principles to the business to ensure potential homebuyers can meet their financial obligations.

Why did CHMC Decide to Take Action?

CHMC decided to take action because their July 2020  underwriting changes were not as effective as they had anticipated, which resulted in a decline in market share.

A healthy market share is an important consideration as it helps us fulfill the financial stability aspect of our mandate. We aim to maintain enough presence to be able to: a) step in to support financial stability and b) absorb additional market share as required.

CHMC continue’s to be vigilant in their underwriting practices as high levels of mortgage debt can negatively affect economic growth and put the financial system at risk. CHMC is actively monitoring market conditions and will work with federal partners to ensure appropriate macro-prudential policies are in place. (Source: CHMC Canada)

Need Help With Your Mortgage?

Real Solutions, for real people. We have tailored mortgage solutions to meet your needs. If you are unsure of how these recent mortgage changes can affect you, or have any questions please feel free to Contact Mortgage Broker Amandalyn Findlay Mortgages for a Free Mortgage Quote today!