So, most of you have probably heard or seen the news this past week regarding CMHC’s announcement regarding the new mortgage rules. With 2020 already being somewhat of a whirlwind, CMHC has now made it somewhat even more interesting especially for first-time homebuyers.
The Canada Mortgage and Housing Corp. (CMHC) has tightened its lending policy where it will become more difficult to obtain Mortgage Default Insurance effective July 1st, 2020.
Let’s take a look at the new changes below:
- CMHC will no longer allow homebuyers to use borrowed funds for their down payment, such as a personal unsecured line of credit.
- CMHC is increasing the qualifying credit score for mortgage insurance to 680 from 600 for at least one borrower.
- Gross Debt Servicing Ratios will be reduced to 35% compared to the current 39%. (GDSR takes into consideration monthly Mortgage payment, Property tax payment, Insurance payment and Utility Bills. The total of all the four payments cannot be more than 35% of Borrower’s gross monthly income.
- Total Debt Service Ratio will be reduced to 42% compared to the current 44%. (TDSR is calculated on gross annual income required to cover all other debts and loans in addition to the cost of servicing the property and the mortgage - principal, interest, tax, heat etc).
- CMHC has also suspended refinancing for multi-unit mortgage insurance except when the funds are used for repairs or reinvestment in housing.
According to the Ratehub.ca mortgage calculator, using the current mortgage qualifying rate of 4.94% and GDS limit of 39%, a family with an annual income of $100,000 and a 10% down payment would have qualified for a home valued at $524,980*.
Under the new GDS limit of 35%, the same household can now only afford a home of $462,860. This is a decrease in buying power of almost 12%, all due to the change in the GDS limit.
CMHC’s President and CEO Evan Siddall said, in a release.
“These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
Also, to note is that Genworth Canada (Canada’s largest private residential mortgage insurer) has announced that it will not follow CMHC in tightening mortgage insurance eligibility.
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What does this mean for first time home buyers with less than a 20% down payment?
This will put an increased strain on buyers looking to enter the market with a limited budget. And now that budget could dramatically decrease for some unless they can purchase in the next few weeks. (Depending on their mortgage approval).
Some tips that we generally promote to first-time homebuyers are as follows:
1) Save, save, save, and work on a budget when preparing to buy your first home. Try to sacrifice items so that you can save enough for your first down payment.
2) Build/increase your credit rating and avoid unnecessary expenses. (i.e.: large car loans, credit card bills, pay down student loans, etc.)
3) Try not to worry about Keeping Up with the Jones'. The first home is your steppingstone. Don't worry if it doesn't compete with others, you'll make it your temporary home that fits your needs and when the time comes you can either sell it or keep it as a rental property and move on!
Lastly, if you were planning on looking to buy in the short-term, now is the time. With pent up demand especially in the GTA stemming from the quarantine, more and more buyers will be looking to enter the market. And now with the mortgage restrictions on the forefront, buyers may want to avoid the financing limitations and take advantage of the low rates in the current market.
The real estate market in the Greater Toronto Area is vast and always changing, but Team Bhavsar is always available to discuss and help buyers or sellers understand how these changes would affect them individually.
Want to know how the new mortgage rules apply to your specific situation? Consult our best real estate agent for free!
Written by Kalpana Bhavsar and Paul Bajwa.
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What Is A Mortgage?
When you purchase a house, you are making monthly payments to pay it off. You borrow money from a bank in order to pay for the mortgage and are paying the bank back. Learn more about mortgage
The down payment is the amount you will pay upfront to obtain a mortgage. Learn more about down payment
An interest rate is charged with your mortgage since you are borrowing money from them. The smaller the amount you borrow, the lower your interest charge will be.
Mortgage Term or Amortization Period
The amortization period is the total length of time over which you plan to pay off your mortgage.