CMHC reduces affordability for first time home buyers

First time home buyers woke up to a shock on June 4th as the insurer changed their policy resulting in a decrease in affordability buy about 10%. This is due to a reduction in their lending ratios, which are used to look at income vs debts to ensure borrowers can cover their mortgage payments and have enough left over to cover living expenses. These changes will only affect those putting down less than 20% who are insuring their mortgage through CMHC, while Genworth has announced they will NOT be following suit. Canada Guarantee has not made an announcement yet.

While this was the biggest change, it wasn’t the only one: they also increased the minimum credit score from 600 to 680, and have barred borrowed money from being used as down payment. Gifts from family will still be accepted, but first time home buyers won’t be able to pull from their lines of credit to help with their purchase.

CMHC believes there is too much risk present in the market right now, especially for first time home buyers, so these precautions are intended to help protect them from taking on more debt than they can manage.

Let's take a look at a $500,000 purchase with $50,000 down payment. The mortgage would be $463,950 (after $13,950 in CMHC insurance fees).

Right now, we're looking at needing an income of $93,300 to purchase this property at a GDS requirement of 39%. (Property tax at $1,800, condo fees $300, heating at $50.)

This income required increases to $103,970 in order to purchase the same property. 

So, this is a 10.3% increase in the requirement of income.

Alternatively, a $93,300 income would provide for a purchase of $447,000. Or, just 10.6% less.

The move comes as the market continues to heat up in the new post-COVID world, and as interest rates march downward, with some 5-year fixed rates getting below 2%.

The CMHCs changes will kick in on July 1st.