Qualifying for a mortgage is about to get harder for anyone who doesn’t have at least a 20 per cent down payment for a home, which is likely to have an outsized effect on first-time buyers.
Canada Mortgage and Housing Corporation (CMHC) is tightening its rules to qualify for an insured mortgage.
At least one applicant’s credit scores will need to be 680, up from the previous minimum of 600. To ensure borrowers can keep up with payments, maximum total debt service ratios will be lowered from 44 to 42. Gross debt service ratio drops from 39 to 35.
CMHC also says “non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes.”
In other words, buyers will no longer be able to borrow money for a down payment, which follows a similar move by Bank of Nova Scotia.
CMHC is also suspending refinancing for multi-unit mortgage insurance, unless the money is being used for repairs or reinvestment in housing.
The changes are effective July 1, 2020.
“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” said Evan Siddall, CMHC’s President and CEO, 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.”
CMHC stopped short of raising the minimum down payment from 5 per cent to 10 per cent after saying it was appropriate two weeks ago during testimony to the House of Commons finance committee. CMHC also said home prices could fall between 9 per cent to 18 per cent in the next 12 months.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.