The New Deal
So, late yesterday evening, the CMHC dropped another bombshell on home buyers once again. Just last week the we saw the mortgage qualifying rate drop which actually helped qualification (albeit just slightly). This new update is sure to push people on the edge of becoming home owners out of the market altogether once again.
Three Steps forward, two steps back...
GDS/TDS requirements
Most potential home buyers see GDS/TDS and think what is that? GDS is the amount of income you would be using to spend on housing costs. Mortgage principal and interest, property taxes and heating costs. This number up until July 1st, was at 39% for extremely credit worthy buyers, the TDS would be the total amount of income being used to service all your debt. Things like auto loan, credit cards, lines of credit, student loans, etc would be calculated here. The previous maximum was 44%. By lowering this back to 35% GDS and 42% TDS means translates into the amount of purchase price you could qualify for by about 12%. If your pre-approval amount in June was for $300,000, come July 1, 2020 it's going to be reduced to approximately $265,000.
Minimum credit score requirement
This is the one that's going to hurt the most, as this is a HUGE jump in credit quality requirements. The increase from the current minimum of 620, up to 680 will have a far larger impact than any other change announced. There are plenty of high quality borrowers between that 650 and 680 range that could be reduced to that lower score because of a single missed phone bill payment from a few years back. A divorce, sickness, death of a loved one, or a short term interruption in income (due to global pandemic). This doesn't make them a long term credit risk, it just makes them human.
I've been reading credit files for 25 years and anyone who's spent any time working in consumer credit will confirm that you could just as easily have someone with a 661 score and someone with a 720 score that look almost identical on paper. To question why the score on one file is lower than the other is to set off a chain of events that could take 6-12 months to fix and the jumping through hoop after hoop only to find your credit worthiness jump to 667. At the same time others could have adding 5 figures of debt and see their scores jump from 725-785. The credit scoring system that is being used is just not reliable enough to dismiss borrowers on the edge.
Oversight, with humans assessing overall risk is far more reliable predictor. In the industry we call that "common sense" lending, but unfortunately, this practice has all but been legislated into extinction on insured mortgages.
Down Payment Requirements:
Non traditional (or borrowed) down payment - this means you can no longer finance your down payment. If I'm being honest, I'm actually not opposed to this change. I've never believed adding a large liability when buying a home was ever a great idea. Imagine you're a first time home buyer that does not have the required amount of down payment then borrowing $15,000 on an installment loan or line of credit to use as a down payment. Now, on top of the new mortgage obligations, + property taxes, + hydro + insurance, add in maintenance and factoring in the unexpected. This additional liability could easily create more problems that it solves. I think we most of us can agree that this has never been a great option for most borrowers situations.
From the East, to the West.
Evan Siddall speaks for the National Canadian Housing market, but entertain me for a moment as I believe there is NO National Housing market, merely pockets of regional markets. The market drivers in Winnipeg, MB will always be different that those in St. John's, NL, that's not up for debate. So why is that CMHC continues to implement blanket legislation that stifles much needed momentum in one part of the country to counteract too much momentum in another. Let's call this move today what it is: another knee jerk reaction and attempt to slow down the very over heated Toronto/Vancouver housing markets. This broad stroke approach does nothing to help provinces and cities that do NOT have overly inflated housing markets.
At a time when people are trying to recover from the Covid19 crisis that's kept most Canadians under lock and key for months, this is just another setback to those smaller economies who rely on the housing sector. During the pandemic, many took the time to take stock of their lives, and many had finally made plans to move from the sidelines and onto the playing field this year. So many discussions I'm having with clients today are about them having finally made the decision to move out of their parents homes, or from their rented spaces and make the leap into home ownership to start building equity for their futures. This announcement just adds more insult to injury for many that are trying their hardest to enter the next stage of their lives.
If you believe this latest move is about tax payer risk, take a revisit of a post I wrote in Feb 2018: The dirty little secret of the Canadian Mortgage Industry
Mark Norman has been an active and engaged mortgage broker serving the St. John's, Newfoundland and surrounding areas since 2004. He achieved his Accredited Mortgage Professional (AMP) designation in 2006. During that time, he has helped thousands of clients finance (and re-finance) homes all across the country. He is an unbiased and educated voice on all things mortgage related in Canada. If you are looking to implement an actual strategy to your mortgage borrowing, and want someone in your corner that is constantly looking for ways to keep more of your hard earned dollars in your pocket. Look no further. To discuss your situation, you can connect with him via phone (709)743-3939 email: mark@normanlane.ca or Zoom/Google Meeting
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