Everything you need to know about the new Canadian mortgage rules introduced in 2020
COVID-19 has exposed the vulnerability of Canadian financial markets. To protect the country’s economy and the housing market amid uncertainty, this year the Canada Mortgage and Housing Corporation (CMHC), the country’s leading mortgage insurance provider, changed its criteria for new applicants seeking insured mortgages.
In this article, we give you an overview of these new mortgage rules.
The new Canadian mortgage rules
As of July 1, 2020, the requirements for obtaining an insured mortgage loan in Canada are no longer the same. These new rules relate specifically to new loan applicants, who must have their mortgage insured by CMHC when their down payment is less than 20% of the total purchase price.
GDS and TDS ratios
The first new mortgage rule concerns the gross debt service (GDS) ratio and the total debt service (TDS) ratio.
The GDS, which is the percentage of the loan applicant’s gross income that goes toward paying the mortgage (principal and interest), property taxes and condominium fees, is now capped at 35%.
The TDS, which combines the GDS and all of the loan applicant’s other unpaid debts, is now capped at 42% of the applicant’s income.
Minimum credit score
The second new mortgage rule concerns the loan applicant’s credit rating: the new rules have raised the minimum credit score to 680.
Non-traditional sources of down payment
The third new mortgage rule concerns non-traditional sources of down payment. As of July 1, 2020, down payments from non-traditional sources like a personal loan, loan granted by a family member, etc. are no longer accepted.
Why were these new mortgage rules introduced?
These new mortgage rules were introduced in anticipation of the possible economic impacts of COVID-19 on the Canadian housing market. These measures are also intended to protect buyers and reduce risks to governments and taxpayers.
The new rules are also intended to promote stability in the housing market, and to reduce excessive demand and the growth in house prices.
In short, the new Canadian mortgage rules aim to reduce the risks for new buyers whose loans must be insured in a difficult economic environment.
What are the options for the new insured mortgage applicant?
So what are the new buyer’s options when they want to get a mortgage in this context? Based on the new Canadian mortgage rules, they could:
- come up with a down payment equal to or greater than 20%
- improve their total debt amortization ratio
- explore other down payment options
- improve their credit rating
One of the other two mortgage loan insurance providers in Canada (Genworth and Canada Guaranty) may also be an option if the applicant’s bank or financial institution works with these providers. These companies have different eligibility criteria.
The new Canadian mortgage rules – toward a better future!
Within the next 12 months, CMHC forecasts a 9% to 18% drop in house prices. These new mortgage rules will protect new homebuyers and ensure greater stability in the Canadian housing market.
To learn more about mortgage financing, we invite you to browse the blog section of our website. And if you have any questions or would like to discuss your home buying project with our team, please contact us.