Nathan Scott and his fiancée, Dianna Yanchis, are thinking about leaving Liberty Village behind for a home in the suburbs that offers a bit of green space. Luckily, says Scott, 27, they had their mortgage approved in May before the Canada Mortgage and Housing Corp. (CMHC) announced changes to its rules for obtaining an insured mortgage.
“We have four months locked in,” said Scott. “If we don’t buy during that time, we’ll have to resubmit our paperwork and go through the process again. By then, CMHC’s changes will be in effect.”
Mortgage default insurance is mandatory in Canada for anyone making a down payment between five per cent and 19.99 per cent of a home’s purchase price.
CMHC, the federal Crown Corporation that is Canada’s largest underwriter for mortgage default insurance, announced June 4 that it was tightening its rules for obtaining it. The new rules, effective July 1, mean applicants must carry less debt (39 per cent of gross income vs. 44 per cent); will need a better credit score (680 vs. 600) and gross debt/total debt service ratios of 35 per cent and 42 per cent, respectively; and won’t be able to borrow money from a line of credit or elsewhere to make their down payment.
However, for the moment, the two private mortgage insurers, Genworth Financial and Canada Guaranty, have said they will not follow suit.
“We are fine credit-wise, because we have a pretty high score,” said Scott, “but we might get less money (in terms of the approved mortgage amount) if we have to reapply. Having the other two lenders say they won’t follow CMHC’s lead helps.”
Mortgage broker Jerome Trail, owner of the Mortgage Trail Inc. in Toronto, says there will be no impact on the individual borrower.
“When CMHC made the announcement, it was very dramatic, and there was a media storm within the industry,” Trail said. “Then the other two insurers said they were content with the current underwriters’ guidelines and had no plans to make changes, so it was a big flap about nothing.”
CMHC itself may see the biggest difference, Trail noted, because the major change in its required credit score to 680 from 600 will disqualify about 10 per cent of its usual applicants. A credit score of 580-669 is considered fair, according to Experian.com, and a score of 670-739 is considered good.
Philip Weir, mortgage broker and president of a Dominion Lending Centre in Vaughan, says CMHC’s recent rule tightening seems to be another obstacle for first-time home buyers, following the 2018 implementation of the stress test, which requires buyers to demonstrate that they can keep up with mortgage payments despite changing interest rates.
“The inability to use borrowed money for a down payment hurts young kids trying to get into the housing market,” Weir said. “Most lenders deal with all three insurers, so they will send the mortgage applications to the others.
“So far, so good — it has really affected nobody.”
Robert McLister, the mortgage editor at rates.ca, says the private insurers will get the non-CMHC compliant mortgages to handle and speculates that Genworth and Canada Guaranty could eventually charge higher insurance premiums for their flexibility regarding qualifications.
At present, however, “you as the borrower won’t even know what’s happening.”
McLister expects to see CMHC “take up to a 20 per cent hit on its mortgage business,” but noted that “insurers don’t only want all the castaways, so they (the two private insurers) may tighten their own rules.”
Calculating your scores
For prospective buyers, it’s helpful to be prepared by knowing your credit score and debt service ratio before applying for a mortgage.
Credit scores fall into a range from 300 to 850 and are determined by an algorithm using the information from an individual’s credit report, which includes whether bills are paid on time and how much credit card debt is carried by an individual. A credit score is used by lenders to decide who gets a loan, what the interest rate will be on that loan and an individual’s credit limit.
The two agencies that determine credit scores for Canadians are Equifax and TransUnion and they provide credit reports, scores and monitoring to consumers for a price. However, there are websites that offer a free credit score and credit report: Borrowell for Equifax and Credit Karma for TransUnion information.
Gross debt service (GDS) ratio and total debt service (TDS) ratio are the measurements used by mortgage insurers to determine if a borrower can manage monthly mortgage payments and repay borrowed money. The GDS informs the lender about the percentage of your monthly income that goes toward housing costs, while the TDS tells the lender at a glance what percentage of a prospective homeowner’s income is used to pay debts, including rent, credit card bills, child support and car loans. CMHC requires a GDS of 35 per cent or less and a TDS of 42 per cent or lower.
You can determine your GDS ratio by adding together your monthly rent/mortgage cost (principal only), the related interest, your property taxes and your heating costs and divide by your gross monthly income. For example, if you earn $ 12,000 in gross monthly income and pay $ 3,500 in rent and $ 100 for heat each month, your GDS is $ 4,000/$ 12,000 or 33 per cent.
Calculate your TDS by adding together your rent/mortgage principal, the related interest, your property taxes, your heat and other debt obligation and divide by your gross income. (You can calculate both ratios using monthly income or annual income.) For example, if your monthly mortgage payment is $ 3,500, your interest is $ 100, you pay an auto loan of $ 1,000 monthly and credit card payments of $ 400 monthly, your debt-to-income ratio is $ 5,000 ($ 3,500 + $ 100 + $ 1,000 + $ 400) divided by $ 12,000, or 42 per cent.
You can also use CMHC’s calculator.
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Meanwhile, back in Liberty Village, Scott and his fiancée are hoping to find a dream home before their mortgage approval requires renewal.
“The prices are high and there still isn’t much to choose from,” he said. “We’re viewing the houses in person, wearing gloves and masks, because pictures can be misleading.
“It’s exciting to go out and see all of the homes. It will be an interesting summer, for sure.”