CMHC Tightens Lending Rules For Insured Mortgages

Rishi Sondhi, Economist, 416-983-8806 

Ksenia Bushmeneva, Economist, 416-308-7392

Date Published: June 5, 2020

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CMHC Tightens Lending Conditions for Insured Mortgages

  • CMHC announced a series of moves aimed at tightening lending conditions for insured residential mortgages yesterday. These moves follow a speech by CMHC CEO Evan Siddall on May 19th in which he hinted that tightening maneuvers could be in the works. 
  • The changes are effective on July 1st and break down as follows:
    • The maximum for gross and total debt service ratios for insured mortgages will be lowered. The former will fall from its current 39% to 35%. Meanwhile, the latter will drop from 44% from 42%.
    • The minimum credit score, for at least one borrower, required to obtain insurance from CMHC will be raised from a minimum of 600 to 680.
    • CMHC will ban potential buyers from using "non-traditional" sources to make a down payment. CMHC defines "non-traditional" sources as those which are not tied to the purchase and sale of the property. Examples include unsecured personal loans or unsecured lines of credit.
    • They will also suspend refinancing for multi-unit mortgage insurance, except when the funds are used for repairs or reinvestment in housing.
  • In the wake of the CMHC CEO's early speech, some had wondered about the possibility of changes to down payment rules or insurance premiums. No such changes were made.

Key Implications

  • CMHC's move to tighten mortgage lending standards will almost certainly reduce home sales to some extent. It will also likely cause some pull-forward of activity into June as buyers move to get ahead of the July 1st implementation date. The changes may also amplify the impact of the existing stress test on insured mortgages, which call for borrowers to be tested at the Bank of Canada's posted rate, by causing them to bump up against maximum allowable debt service ratios faster. The impact of the policy is blunted by the fact that insured mortgages generally make up a relatively small and shrinking share of the market. At the start of this year, insured mortgages accounted for roughly 26% of all newly originated mortgages. However, the timing of its implementation – during a period of pandemic-related weakness – poses a downside risk. 
  • The impact from the latest changes to debt service ratios on mortgage qualifications will be partially mitigated by lower interest rates across a wide range of credit products this year. As per our recent report, debt service payments as a share of household income are expected to fall this year. 
  • Yesterday's policy changes will disproportionally impact first-time homebuyers (FTHBs), as they are more likely to take out an insured mortgage when purchasing their home. As our recent report shows, younger Canadians, who make up the majority of first-time buyers, were already hard-hit by the pandemic accounting for a larger share of job losses than other groups.
  • In addition, survey evidence suggests that a large share (perhaps as high as 30%) of FTHBs rely on borrowed funds (i.e. loans from financial institutions) for down payments. These funds would be tough to replace in normal times, and would be significantly harder in the current environment. 
  • Consistent with sales, we expect the policy changes will place some added downward pressure on prices.  Average home prices are likely to be further pressured by a compositional shift towards lower priced homes. This is because some borrowers who qualify under the new rules will be forced to move down the value spectrum. Some offset to these factors comes from the fact that first-time homebuyers tend to purchase less expensive homes.
  • Canadians also get their mortgages insured through private insurers. Genworth and Canada Guaranty account for roughly half of the mortgage insurance market. There appears to be no word yet on whether these lenders will match the rule changes. If not, this could provide a leeway for buyers who don't qualify with CMHC. 
  • These changes will improve the soundness of the financial system in the long-run by restricting loan issuance to those whose better suited financially. However, in the near-term they will add further pressure to a housing market and economy that are severely challenged by the pandemic.
     

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