CMHC announces higher credit score requirements for mortgage insurance. What does this mean for you?

Being able to borrow money to purchase a home has long been the goal of many Canadians. However, given that it is going to be the biggest purchase you will make in your life, it should not be a decision that is made lightly. Ensuring you can afford the repayments of the loan you are taking on is a major requirement of lenders and, announced last week, the government backed-insurer Canada Mortgage and Housing Corporation (CMHC) is changing its lending standards.

The CMHC is the country’s largest mortgage insurer, providing mortgage loan insurance to buyers with a down payment lower than 20% of the value of the house. The insurance protects both the lender and the homeowner in situations of economic hardship when payments cannot be made. Just like we are experiencing with COVID-19. 

How has COVID-19 led to the tightening of the rules for mortgage insurance qualification? 

Concern has been expressed by CMHC that we could see a decline of between nine per cent and 18 per cent in average house prices over the next year because of higher mortgage debt and increased unemployment due largely to COVID-19. The fear is many homeowners may have over extended themselves when making their home purchase, and their financial vulnerabilities have now been exposed due to the pandemic.

CMHC’s President and CEO, Evan Siddall, said in a statement that "COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians."

What are the changes that are coming into effect?

Prior to Thursday’s announcement, the qualifying credit score for mortgage insurance was 600. However, effective July 1, 2020 borrowers with less than a 20% down payment will need to have a credit score of 680 to qualify for the mandatory mortgage insurance. 

In addition to a higher credit score being required, the following changes have been made:

• Gross debt servicing requirements have tightened from a 39% maximum to a 35% maximum. What does this mean? It basically means that borrowers must be carrying less house debt in relation to their income than before in order to qualify. The total of your mortgage payments, taxes, heating costs and 50% of condo fees cannot exceed 35% of your income. The 4% drop means that the borrower’s budget for a home will need to be lower. 
• Non-traditional sources of down payment funding (e.g. a personal unsecured line of credit) will no longer be considered equity for insurance purposes. What does this mean? It means borrowers are going to have to find their down-payment from other sources, not loans. 

Critics are saying that the changes being made by the CMHC will only make it tougher for people to get a mortgage, despite an already weakened housing market. While the majority of mortgages insured by the CMHC will not be affected by the more stringent qualifications, hopeful home buyers who carry higher debt loads, have lower credit scores and those that would be relying on borrowed down payments will be the ones most impacted. 

CMHC Chief Executive Evan Siddall says that measures will help curtail “excessive demand and unsustainable house price growth.”

What does this mean for Refresh Financial’s clients?

Our clients are already taking the right steps to a more secure financial future by working to increase their credit score. The CMHC changes means it might take a little longer to reach the goal of home ownership. As disheartening as it may sound, there’s a silver lining. A credit score of 680 will give you access to more credit products at a lower interest rate than a credit score of 600, therefore it’s worth the extra time and effort needed to get your score where it needs to be. 

The higher your score, the more it shows the lenders your ability and willingness to manage the credit you already have access to, and the debt you are currently carrying. Responsible behaviours will increase your score, and these are invaluable skills to have, especially when you have mortgage payments. 

To learn more about Refresh Financial’s credit building program, go to RefreshFinancial.ca/credit-building