Canadian real estate has been a tough nut to crack for some homebuyers, and those with less than 20 per cent as a down payment now face another challenge, with Canada Mortgage and Housing Corp. (CMHC) announcing tighter qualification rules for borrowers of high-ratio mortgages. The move was in response to the economic vulnerabilities sparked by global pandemic. The changes, which include lower debt thresholds and higher credit ratings, came into effect on July 1, 2020. If you’re in the market to buy a home but have less than 20 per cent as a down payment, here’s what you should know.

New Mortgage Qualification Rules:

If you have less than 20 per cent of the home’s purchase price, CMHC has:

  • limited the Gross/Total Debt Servicing (GDS/TDS) ratios to its standard requirements of 35% (from 39%) and 42% (from 44%), respectively;
  • established a minimum credit score of 680 (from 600 previously) for at least one borrower; and
  • stopped treating non-traditional sources of down payment that increase indebtedness, as equity for insurance purposes.

What Is a High-Ratio Mortgage?

In order to buy Canadian real estate and qualify for a mortgage, buyers must have a minimum down payment of five per cent of the home’s total purchase price. However, when the homebuyer has less than 20 per cent to make as a down payment, they will need to take out a high-ratio mortgage, which requires mortgage default insurance. This is designed to protect the lender in case of mortgage payment default by the borrower. Insurance premiums can either be paid up front, or added to the mortgage payments.

Mortgage Changes & Canadian Real Estate

In the past, we have seen mortgage qualification changes prompt a flurry of activity leading up to the deadline, as homebuyers tried to complete their purchase just under the wire. This was indeed the case before the OSFI mortgage stress test on high-ratio mortgages took effect in October 2016. The mortgage stress test was then expanded to all mortgages on January 1, 2018. Prior to these changes and others before them, we saw transaction increase.

Leading up to the above-mentioned Jan. 1, 2018 deadline, the Canadian Real Estate Association reported that national home sales in November 2017 were up 3.9 per cent month-over-month. The following month, December of 2017, saw Canadian home sales surge 4.5 per cent month-over-month.

“National home sales in December were likely boosted by seasonal adjustment factors and a potential pull-forward of demand before new mortgage regulations came into effect this year,” Gregory Klump, CREA’s Chief Economist, noted in the Canadian Real Estate Association’s release. “It will be interesting to see if monthly sales activity continues to rise despite tighter mortgage regulations that took effect on January 1st.”

This time, however, RE/MAX did not anticipate a similar response from buyers.

CMHC is one of Canada’s mortgage insurers. CMHC’s two private-sector counterparts, Genworth Financial and Canada Guaranty Mortgage Insurance Co., have confirmed that they will not follow suit, meaning homebuyers with a down payment of less than 20-per-cent will still be able to get a mortgage at historically low interest rates.

“I think this time it’ll be a little bit less of a frenzy,” says Christopher Alexander, Executive Vice President and Regional Director, RE/MAX of Ontario-Atlantic Canada. “Typically, when CMHC changes their requirements, the other insurers follow suit. This time they didn’t, so I think this is going to create better balance heading into the summer.”

Low Housing Supply, Rising Prices in Canadian Housing Markets

“RE/MAX wholeheartedly supports responsible lending practices, such as CMHC’s most recent adjustments to mortgages, but this is a temporary solution to a bigger issue – not enough housing supply to meet demand,” says Alexander, who points out that major hubs such as Toronto, Vancouver and Montreal will continue to be challenged to keep pace with demand in the foreseeable future – particularly due to the fact that our government continues to attract and promote more and more immigration to help bolster the Canadian economy. “This is a great thing, but all of those people are going to need a place to live.”

Alexander has been vocal about the need for a national housing strategy to address problematic inventory levels and resulting rising prices.

“There’s a huge delta between [supply] and demand, and there’s no national housing strategy to alleviate some of that pressure.”

Alexander further said in an interview with BNN Bloomberg, “If we don’t find a long-term strategy that will bridge the gap between supply and demand, we are going to continue seeing price appreciation and continued affordability issues in the foreseeable future.”