After the announcement of CMHCs new mortgage rules Last week, Canada’s other two mortgage insurers, Genworth Canada and Canada Guaranty, confirmed on Monday that they will not be following CMHC’s lead.
“Genworth MI Canada Inc …. confirms it has no plans to change its underwriting policy with regard to debt service ratio limits, minimum credit score and down payment requirements,” the company said in a statement. release.
Likewise Canada Guarantee said it “confirms that no underwriting changes are envisaged as a result of recent industry announcements.”
To summarize the changes to CMHC’s mortgage rules, the following will apply to insured mortgages (those with a down payment of less than 20%) from July 1, 2020:
- Maximum gross debt repayment (GDS) ratios will be reduced to 35% (from 39%)
- Maximum Total Debt Service (TDS) ratios will be reduced to 42% (from 44%)
- The minimum credit score required to qualify increases to 680 (from 600) for at least one household borrower
- Many non-traditional sources of down payment that “add to debt” will be banned
- However, it has been confirmed that borrowers can continue to use a loan from their RRSP through the Home Buyers Plan, a home equity line of credit (HELOC) on one of their second properties, or a HELOC on a property owned by their parents as the money is donated.
“We recognize the potential ‘pro-cyclical’ negative effects on the housing markets of CMHC’s decision to tighten adoption,” CMHC CEO Evan Siddall wrote on Twitter in response to criticism. “However, the benefits of preventing over-borrowing far outweigh these costs. Inaction also exposes young families to the tragic prospect of exclusion. “
Why the other insurers will not adopt the new rules
Commenting on his decision, Stuart Levings, president and CEO of Genworth Canada, said the current underwritten mortgage underwriting policy already allows the company to manage its risk exposure “prudently”.
“Genworth Canada believes that its risk management framework, dynamic underwriting policies and processes, and continuous monitoring of conditions and market developments allow it to prudently assess and manage its exposure to mortgage insurance,” said Levings, “including its exposure. to this segment of borrowers with lower credit scores or higher debt service ratios. “
Likewise, Canada Guaranty said it has been well served over the years by its existing underwriting criteria and sees no need to make adjustments now.
“Canada Guaranty uses a dynamic underwriting process that consistently updates our underwriting policy to reflect changing economic conditions and emerging mortgage default patterns,” said Mary Putnam, VP, Sales and Marketing of Canada Guaranty, in a press release, adding that this has resulted in the lowest loss ratio in the industry.
“Recent insurer announcements regarding down payment and minimum credit score represent a very small part of Canada Guaranty’s business, and we will remain cautious in these areas,” she said. “Given the implementation of the qualifying stress test and historical default patterns, Canada Guaranty does not expect borrowers’ debt service ratios at the time of origination to be a significant predictor of mortgage defaults.”
Observers saw the announcements as positive for borrowers who will continue to have some options in the markets if they are unable to meet CMHC’s stricter qualification standards.
“We love this decision,” commented Jaeme Gloyn, National Bank of Canada analyst. “The decision will help mitigate potential negative effects in the housing / mortgage market as we oppose tinkering with mortgage underwriting criteria in light of the COVID-driven housing market slowdown.”
NBC had estimated that CMHC’s new rules on debt service relationships and credit scores could have affected up to 20% of CMHC insured borrowers.
Consequences of the new CMHC mortgage rules
So what are the implications of CMHC’s new rules for borrowers looking for high ratio mortgages?
Benjamin Tal of CIBC estimates that the change means that about 5% of home buyers are no longer eligible for a mortgage.
For those who can, it means a reduction in their purchasing power.
“Fewer people are eligible for a mortgage, and if they do, the maximum they can borrow is about 10% or more less than it is now,” wrote Ross Taylor, a mortgage agent with Concierge Mortgage Group.
Taylor notes that a household earning $ 120,000 is currently eligible for a mortgage of about $ 565,000 plus insurance. With CMHC’s stricter rules, that same household would only qualify for a mortgage of about $ 502,000 plus insurance costs.
“… maintaining good credit hygiene is more important than ever when you want to buy a home, especially if you need mortgage insurance,” added Taylor.