CMHC tightens criteria for loan insurance

Twice in the past few weeks, the CMHC has issued warning signals and is trying to bring more discipline to the mortgage lending market.

First, on May 28 in a communiqué announcing the immediate end of capital withdrawals for the market of 5 dwellings and more, then on June 4 by unveiling its criteria for qualifying borrowers as of July 1, for buyers of single-family homes, condos or plexes of 4 dwellings with an owner-occupied dwelling.

With these announcements, some social media got into a frenzy and a few newspaper headlines were alarmist in tone. Should we be concerned? In the case of plex buyers, the rules announced are for all intents and purposes the same as those already in effect. However, we understand here that the banks, as well as CMHC itself, will be stricter and less permissive for people whose financial situation, in fact, does not allow them to buy a property. Of the three criteria announced, only the issue of non-traditional sources of financing marks a change:

• Gross Debt Service (GDS) and Total Debt Service (TDS) ratios will be limited to standard 35/42 requirements;
• A minimum credit score of 680 will be required for at least one borrower;
• Non-traditional sources of down payment that increase indebtedness will no longer be accepted for loan insurance purposes.

The 35% and 42% debt ratios have been known and used for ages by the banking industry, as well as the credit score of 680, also a fairly well-established standard, although some bending of those rules have been made in the past. As a reference, more than 50% of the surveys conducted for tenants with ProprioEnquête give a score higher than 700 points (on a comparative basis with the one used by the banking sector). This shows that a score of 680 is a fair way to establish the acceptability of a file. 

Moreover, for buyers who did not have the savings needed for the down payment or who did not want to use their savings for their down payment by taking advantage of a loan, this way of doing things is a thing of the past. This changes the situation a little for first-time buyers, but the uncertainty is now part of the real estate market as to the values of certain market segments (condos not to mention the name). Isn't it entirely justified to slow down the enthusiasm of people who haven't been able to save a downpayment? The serious buyer will have to find ways to fill his bank account or simply aim for a less ambitious purchase. In the field of plexes, the market remains rather difficult to access, some first-time buyers will have more difficulty to fill a downpayment with prices fluctuating around $700-800,000 for duplexes or triplexes.

The multi-dwelling market shaken

The shock wave is much more serious on the multi-dwelling unit side, as the CMHC's announcement restricts the flexibility of investors in this market. Until May 28, owners who had the opportunity to renovate could do so and then finance themselves by increasing the value of their property through an equity withdrawal. They could refinance at low rates and reinvest the money thus re-borrowed on another real estate project (or not), or simply use this money to reimburse the sums invested in renovation, which was sometimes done under more favourable cash flow conditions.  Under its new rule of May 28th, owners can no longer refinance projects that have already been completed. The CMHC will continue to refinance renovation work, but only upon presentation of a plan that demonstrates a favourable impact on profitability ratios. Thus, this is a much smaller playing field, which, despite all its good intentions, will slow down investments in rental real estate. Further details will be forthcoming from the CMHC in the coming weeks and CORPIQ will keep you informed. 

However, you can learn more by watching the Virtual Rendez-Vous des Proprios! which discusses the subject in addition to the current mortgage trends with two mortgage specialists, Benoit Allaire of First National and Serge Michon of the National Bank. (In French)