On June 4, The Canada Mortgage and Housing Corporation ("CMHC") announced changes to its mortgage requirements for insured mortgages (i.e. purchases made with less than 20% down payment) making it harder for first time home buyers to enter the market. At a high level, the main changes that will be effective July 1 include:
An increase in credit score minimums from 600 to 680
Adjustments to the gross debt servicing (GDS) ratios from 39% of annual income to 35%
Adjustments to the total debt servicing (TDS) ratios from 44% to 42%
What does this mean?
It really boils down to one thing: all of these measures will reduce how much individuals and families will eligible for under the CMHC's program moving forward. The new debt-ratios will reduce the purchasing power of home buyers by requiring higher incomes and down payments to afford similar priced houses.
Rate Hub estimates a family with an annual income of $100,000 and a 10 per cent down payment would have been able to buy a home valued at up to $524,980; under the revised rules, that same family can only get approved to buy a home worth $462,860 — a reduction of 12 per cent.
Gross Debt Servicing of 35%: This means all of your housing expenses (mortgage, taxes, utilities, and 50% of condo fees if applicable) will need to be less than 35% of your gross income (i.e. income before taxes). In practice, a household making $100K a year will need to make sure their total housing related expenses are below ~$2,920 a month to be eligible for a CMHC-insured mortgage.
Total Debt Servicing of 42%: This means all of your housing expenses and any other debts obligations will need to be less than 42% of your gross income. Debt obligations typically include student loan payments, fees associate with lines of credit, credit card debt and any other recurring debt payments.
All in all, the changes will make sure first time home buyers aren't over extending themselves with their purchases and will require households to either save more towards a home in the future or consider locations further outside of city centers more in line with their purchasing power.
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