CMHC tightens lending standards, making homes less affordable
Since July 1, 2020, it has become increasingly more difficult for first-time home buyers to buy a home in Canada.
In 2020, Canada Mortgage and Housing (CMHC) began tightening lending standards:
- maximum gross debt service (GDS) ratio drops to 35 from 39;
- maximum total debt service (TDS) ratio drops to 42 from 44;
- minimum credit score rises from to 680 from 600; and
- non-traditional sources of down payment that increase indebtedness are no longer treated as equity for insurance purposes.
CMHC changed its underwriting policies because COVID-19 exposed long-standing vulnerabilities in financial markets.
How tightening standards affect home buyers?
The change reduced the number of homebuyers to qualify for a mortgage by about five per cent.
For qualifying homebuyers, it reduced their buying power. Home buyers can borrow about 10 per cent less than before the change.
A household earning $195,000 with a 20 per cent down payment would currently qualify for a mortgage of $633,000 including mortgage insurance. (Total home price is $770,200) Before the stricter rules, this household buying a $770,200 house, with the same mortgage rate and downpayment, would qualify for a mortgage with an income of $175,000.
Monthly payments for Gross Debt Service
Benchmark price | Principal and interest | Property taxes | Heat and condo fee | Total monthly payment | |
---|---|---|---|---|---|
Detached | $2,001,400 | $11,966 | $850 | $400 | $13,216 |
Attached | $1,100,500 | $6,579 | $500 | $550 | $7,629 |
Apartment | $770,200 | $4,734 | $350 | $650 | $5,734 |
Comparison of gross annual income under GDS ratio change
Former GDS ratio |
Gross annual income | New GDS ratio | Gross annual income | Income difference | |
---|---|---|---|---|---|
Detached | 39 | $408,136 | 35 | $452,552 | $44,416 |
Attached | 39 | $233,476 | 35 | $260,158 | $26,682 |
Apartment | 39 | $175,524 | 35 | $195,584 | $20,060 |
Gross Debt Service ratio
Principal + interest + taxes + heat / gross annual income.
Total Debt Service ratio
Principal + interest + taxes + heat + other debt obligations / gross annual income.