The Canadian Mortgage Housing Corporation (CMHC), the country’s national housing agency, announced yesterday that it would be making changes to its lending conditions for uninsured residential mortgages in the coming weeks.

The series of changes come on the heels of CMHC announcing it foresees a 9% to 18% decrease in housing prices over the next 12 months as a result of the COVID pandemic.

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Effective July 1, the following changes will apply to new applications for homeowner transactional and portfolio mortgage insurance:

  • Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to our standard requirements of 35/42;
  • Establish a minimum credit score of 680 for at least one borrower; and
  • Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes.
  • To give home buyers a better understanding of the upcoming changes to CMHC's mortgage requirements, TD Bank economists Rishi Sondhi and Ksenia Bushmeneva have put together a more in-depth breakdown of what these changes entail for potential homebuyers.

    Sondhi and Bushmeneva say they believe CMHC's move to tighten mortgage lending standards will "almost certainly" reduce home sales to some extent and will likely cause a push in activity in June ahead of the July 1 implementation date.

    "The changes may also amplify the impact of the existing stress test on insured mortgages, which call for borrowers to be tested at the Bank of Canada's posted rate, by causing them to bump up against maximum allowable debt service ratios faster," reads the commentary from Sondhi and Bushmeneva.

    "The impact of the policy is blunted by the fact that insured mortgages generally make up a relatively small and shrinking share of the market. At the start of this year, insured mortgages accounted for roughly 26% of all newly originated mortgages. However, the timing of its implementation – during a period of pandemic-related weakness – poses a downside risk."

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    TD says the impact from the latest changes to debt service ratios on mortgage qualifications will be partially mitigated by lower interest rates across a wide range of credit products this year. And as per a recent report from TD, debt service payments as a share of household income are expected to fall later this year.

    The bank says it believes the mortgage requirement changes will "disproportionately" impact first-time homebuyers (FTHBs), as they are more likely to take out an insured mortgage when purchasing their home.

    Additionally, TD says survey evidence suggests that a large share (perhaps as high as 30%) of FTHBs rely on borrowed funds (i.e. loans from financial institutions) for down payments. These funds would be hard for FTHBs to replace even during the best of times and would be significantly harder in the current environment.

    Consistent with home sales, TD says it expects the upcoming policy changes will also place some added downward pressure on home prices.

    "Average home prices are likely to be further pressured by a compositional shift towards lower-priced homes. This is because some borrowers who qualify under the new rules will be forced to move down the value spectrum," reads the commentary from TD.  "Some offset to these factors comes from the fact that first-time homebuyers tend to purchase less expensive homes."

    What's more, TD says Canadians also get their mortgages insured through private insurers, with Genworth and Canada Guaranty accounting for roughly half of the mortgage insurance market. TD says at this time, there is no word yet on whether these lenders will match the rule changes. If they don't', TD says it could provide a leeway for buyers who don't qualify with CMHC.

    "These changes will improve the soundness of the financial system in the long-run by restricting loan issuance to those whose better suited financially. However, in the near-term, they will add further pressure to a housing market and economy that are severely challenged by the pandemic."