Covid-19 is making news out of many topics that before would have been missed. CMHC, the federal agency that insures high-ratio mortgages, is tightening up its lending rules and that is making huge headlines everywhere. Everyone is suddenly paying attention to the housing market because they are holding their breath and waiting for it to crash. Pre-Covid, this news would have been limited to the finance pages. Agents would have been using it to tell their clients that the time to buy is NOW before you can no longer qualify for a mortgage and these warnings would have likely fallen on some skeptical ears. Not any more. Neighbours I barely know are stopping me on my morning walks and asking (yelling… because we’re six feet away) if CMHC is trying to crash the market. Everyone is wondering what the changes are and what it means for the real estate market in Toronto.
What are the changes? CMHC is lowering the amount of debt you are allowed to have in relation to your income. Under the current loaning practices, a buyer could have a 39% gross debt service (GSD) ratio and a 44% total debt service (TDS) ratio. This means that your total debt, including mortgage payment, loan payments, credit card payments etc can be 44% of your total income. The new rules which take effect on July 1st are lowering these numbers to 35% GDS and 42% TDS. Furthermore, at least one applicant on the mortgage now needs to have a credit score of 680.
What do the changes mean? Buyers who are purchasing a property for less than 1 million dollars and who have less than 20% down will have their purchasing ability affected by about 12%. Buyers in this category are almost always first-time homebuyers and are considered by the banks to be “high risk.” CMHC is a federal agency that was designed to protect the banks from mortgage defaults in this group of buyers so that banks loan money more freely to first-time homebuyers with the ultimate goal of making homeownership more attainable.
These changes to borrowing rules do signal that CMHC is preparing for a market softening. As they are responsible for mortgage defaults, they want to protect themselves if there is an influx of homeowners who can’t pay their mortgage. It does not, however, signal a market crash in Toronto. Tightening lending rules, with our rising prices, is prudent. Yes, it will squeeze out some buyers who don’t have great credit and who don’t have enough income to comfortably cover their debt. This is probably a good thing for the ultimate health and strength of our market.
The Kim Kehoe Team