Welcome back. I did a video on CMHC's predictions and it's a video that actually got quite a bit of traction, lots of engaging comments on it so thank you for that. Since that time CMHC has come out and now actually changed some of their rules around their mortgage insurance program that they offer to people. So if you're a first time home buyer, I think this is particularly important for you to tune into. But if you're not, and you're just interested in what is going on in the Canadian real estate market, or what the government is concerned about what's gonna go on in the Canadian real estate market, then I recommend that you stay tuned.
What is CMHC?
For those of you that don't know, CMHC is the Canadian Mortgage Housing Corporation and it's actually a crown Corporation. So a corporation owned by the government. And part of what they do is they offer lenders insurance on mortgages that are what they consider high ratio mortgages. So if you are somebody who can't afford to put more than 20% down on the purchase of the property, then you require mortgage insurance on that mortgage. So the minimum requirement is 5% and that's what most first time home buyers will put down is a 5% down payment, and then they'll have to pay some CMHC fees as well on top of that, and that CMHC fee is an insurance fee that the lender requires you to get.
Changes to the Rules
CMHC has now changed some of its stipulations on what that buyer is required to have and those stipulations relate to basically debt service ratios, which I'll explain in a minute and credit score as well. Originally their standard was that somebody had to have a minimum of a 600 credit score, they've now jumped that up to 680. What does that actually mean? It just is kind of them moving that goalpost a little bit higher, to show that somebody has a strong history of actually paying their debts back. So they're just making that a little bit tighter. The meat of their announcement actually came through their debt service ratio. So there's two different ratios that a lender looks at and CMHC looks at. One is called your gross debt service, and one is called your total debt service. Gross debt service includes the cost of your mortgage payment, the property taxes associated with that property, and the utilities associated with that property. They don't want those expenses to make up more than 39% of your gross annual income. They've now reduced that to 34%. Total debt service is taking all those same expenses plus any other debts that you have, whether it's student loans or car payments or credit card debt, they group 'em all together, they originally said that can't be more than 44% of your gross income, they've now reduced that down to 42%. They basically want to see Canadians carrying less of a debt load and so you have to fit with inside of those ratios in order to get approved for a mortgage, or at least get approved for a mortgage with CMHC insurance on it.
So how does that affect you?
Well if you put 5% down and you make about $60,000 a year that could decrease your actual borrowing power or purchasing power by about 10%. So the big question is, what is their goal behind changing these numbers? And some of it I'm gonna refer you back to the video that I shot last. And you can go back and look at some of the methodology and thoughts and concerns that CMHC has about where the Canadian housing market is going. So I'm gonna read a quote here from Evan Siddall on what he actually said, and this will give us a glimpse into what CMHC is thinking as it relates to some of these changes. So I think there's a few things that you actually need to look at in that sentence.
So what home buyers will they protect? Well they'll protect first time home buyers, or at least they say that they will. What's the other part? I think this is the biggest part of it. If you look at CMHC, they carry the insurance for so many of those high ratio mortgages, with their predictions that they made about seeing a potential of housing prices drop, the unemployment numbers that we're facing in the midst of this pandemic, as well as just a stunted economy because it was basically shut down. They look down the road and say, wow, we could potentially see an increase in the number of people that are going to default and eventually foreclose on their property. So they're looking at and saying, we need to protect the government and the taxpayers who are essentially writing the checks for this CMHC insurance. So one of the other efforts that evidently they're trying to make is to basically tamp down demand in the market. They've got this weird thing happening where they're making it harder to get approved but then they're dropping interest rates and they're saying, we want to curtail demand. Well, lowering interest rates is certainly not a way to do that, you know, rule changes like this are going to impact first time home buyers who want to get into home ownership.
Is it those first time home buyers that are driving demand?
I would argue at least in our market here in London and the surrounding community, it's folks like myself that are really driving demand. It's younger families, where they are generally higher income earners than they were 10 years ago when they bought their first home. Not to mention that they've still got a lot of runway ahead of them as far as being able to pay off mortgages. So they're the ones that are actually pushing, you know, those five, 600,000, $700,000 price point, which certainly isn't a first time home buyer price point. But what happens is it has this trickle-down effect where the buyers that can operate in that price range, they move down to the next price range, and they pursue heavily on that and it just moves down and down and down. And that's we've seen prices go up and we've seen it actually affect everybody from here all the way down, right to first time home buyers.
So if you want to curtail demand you need to go after the people that are the ones that, like myself, I certainly have more than 20% of equity in that so I don't have to worry about any of these CMHC rules. And so I've got quite a bit of capital to go and invest in another property if I want and continue to push that demand along, providing that the people in my demographic are actually still gainfully employed. And that's something that's more important to look at for driving demand than trying to impair first time home buyers.
There are options
All that being said, the other thing that I will highlight if you don't know is that CMHC is not the only company that actually insures mortgages, it's the only crown Corporation and it is the majority insurance holder here in Canada but there's also two other companies. There's Genworth, which is what I more commonly know as, but it's also MIC which I think is Mortgage Insurance Company is a short form for what it stands for, and there's Canada Guaranty. These are two private organizations that also insure mortgages and they have come out in the last day and said that they have no intentions to adjust their lending practices or the criteria to get a high ratio mortgage. So their criteria is less than what CMHC is, but I would keep that in mind if you are a first time home buyer that is looking, you need to know if your lender works with those two corporations to insure your mortgage.
And this is where I would really make the plug for you. If you're not working with a mortgage broker, then you should be. I think if you just walk into your typical bank, they're not gonna have all of these options for you the way that a mortgage broker would, times like this where the the goalposts are kind of changing it seems like almost weekly, it's important to have a strong real estate team working behind you all the way from your realtor, to your lawyer to your mortgage broker, and so on to make sure that you can actually get the house that you want to and do so in a responsible way.