The club of people who can afford to buy a first home is getting smaller as a result of actions taken by the federal government’s housing specialists.
Kick the housing market while it’s down, will they? Yes, and kudos to Canada Mortgage and Housing Corp. for having the guts to do it. Tightening the standards for deciding who can afford a mortgage is the right thing to do in these uncertain times.
The changes, effective July 1, are really focused on home ownership, not home buying. Instead of raising the minimum down payment to 10 per cent from 5 per cent, as some feared, CMHC tightened the percentage of a buyer’s income that can go toward a mortgage and other debt.
The federal agency also raised the minimum credit score needed to qualify for a mortgage. The changes apply to people who must buy mortgage default insurance because they have a down payment of less than 20 per cent.
The new rules could actually improve affordability by driving prices down. What we know for sure is that people who buy homes will be better able to carry them. They’ll have demonstrated the ability to responsibly manage debt – that’s the higher credit rating. And they’ll be using up a little less of their income to carry their mortgages and other borrowings.
It seems an awkward time to get tougher with first-time buyers. The economy has depended on a strong housing market for years. With the COVID-19 pandemic weighing on economic growth, enthusiastic home buying might have helped spark a recovery.
But treating first-time buyers like kindling is no way to build the financial resilience of Canadian households. Home ownership brings financial stress in a weak economy and we’re nowhere near getting back to normalcy.
Already, payments on about 15 per cent of mortgages at banks have been deferred or temporarily skipped, according to the Canadian Bankers Association. More than 721,000 people have benefited from this relief.
Frankly, the higher standards from CMHC are not all that onerous. The minimum credit score will rise to 680 from 600, but last fall, the credit-monitoring agency Equifax said 70 per cent of credit scores were at 720 or better. Scores will have worsened in the pandemic, though.
Two key tests of mortgage affordability will become mildly more stringent. The gross debt service ratio – mortgage payments, property taxes and heating costs as a percentage of annual income – will max out at 35 per cent, down from as much as 39 per cent, if you have a great credit score and a reliable income. The maximum total debt service ratio – all previously mentioned costs plus other debts as a percentage of income – falls to 42 per cent from 44 per cent.
The upside for far-sighted first time buyers is the potential for house prices to drop and thus make home ownership more affordable through smaller mortgages. CMHC has already said that house prices could fall 9 per cent to 18 per cent as a result of the pandemic’s effect on the economy, before starting a recovery next year. Tighter standards for first-time buyers needing mortgage insurance might tip those declines toward the higher end.
First-time buyers, don’t waste your energy complaining about tighter borrowing rules. Build up your down payment and assess your job security as the economy makes the transition out of lockdown. Make yourself stronger financially as the housing market weakens. We may see a once-in-a-generation opportunity to buy a house affordably.
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Rob Carrick