Because of the Covid-19 pandemic, all aspects of life are becoming a little harder. For sure, this will not last forever. Hopefully within a year or so we will have the vaccine and life will be normal again.
Although no one can predict the future, the Canada Mortgage and Housing Corporation (CMHC) foresee a 9% to 19% drop in real estate prices over the next 12 months. The CMHC insures high ratio mortgages in Canada.
So, to reduce the mortgage risk, the CMHC is making its mortgage underwriting guidelines a little stricter for the insured mortgages. The insured mortgage is mostly used by first time home buyers with a 5% down payment. For insured mortgages, the purchase price of the house has to be below $1 million. If the purchase price of the house is over $500K, then the buyer will pay 5% on the first $500K and 10% on the amount above that. If the purchase price is $1 million, the buyer will pay 5% on the first $500K which is $25K and 10% on the remaining $500K which is $50K. So, his total down payment will be only $75K. The buyer will have to pay the mortgage insurance premium also.
The CMHC has introduced stricter mortgage underwriting conditions in anticipation of potential house price adjustment downward. Whether the real estate prices, especially in cities like Surrey and Vancouver where the most real estate activity is, do slide remains to be seen.
The new CMHC underwriting guidelines will take some of the new first time home buyers out of the real estate market in Canada. That could lower the demand for real estate. But because of the ever-growing arrivals of new immigrants in cities like Surrey and Vancouver, the real estate prices in The Greater Vancouver Area and Greater Toronto Area could remain stable.
Starting July 1, 2020, the CMHC is lowering the Gross and Total Debt Service ratios (GDS/TDS) to 35/42. At least one borrower has to have a minimum credit score of 680. And it is also becoming more stringent as to the source of the down payment.
“It is not only CMHC that is tightening the qualifying guidelines, but even the Alt-A and private mortgage lenders have also cut down their lending loan-to-value ratio from 75% to 65%. That is a huge cut and will affect the borrowers who have bad credit and cannot verify their income adversely, “ said Paramjeet Singh, a mortgage broker in Surrey, BC.
Most self-employed people, who need no income verification mortgages, are already having a tough time because of the Covid-19, and now with this cut back in what percentage of the market value they can get a private mortgage is going hurt that segment of the population even more. This means a whole lot of borrowers will not be able to get a new private second mortgage if they are looking for one. More than the CMHC’s stricter underwriting guidelines, it is the tightening of the private mortgages that could hurt the real estate market significantly.
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