On June 4, 2020, the Canadian Mortgage and Housing Corporation (CMHC) announced changes to the eligibility rules for mortgage insurance, in the agency’s latest response to the COVID-19 pandemic.
The new rules will lower the amount of debt an applicant for an insured mortgage can carry, set a higher credit score to qualify for CMHC insurance, and will require a homebuyer to use their own, and not borrowed, funds for their down payment.
COVID-19 “has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” said Evan Siddall, CMHC’s President and CEO.
CMHC provides insurance that protects lenders if homeowners default on their mortgage. If a buyer has a down payment of less than 20% of the purchase price, mortgage default insurance is required, and is paid by the homeowner. Some properties, including those with a purchase price of $1 million or more, are not eligible for CMHC insurance.
Siddall says the new rule changes will stabilize housing markets by reducing demand and putting a damper on “unsustainable housing price growth.”
Changes are designed to provide housing market stability as CMHC predicts price drops
The changes come as the CMHC is predicting a drop in average housing prices of between 9% and 18% over the next 12 months, as outlined in Siddall’s speech to the House of Commons Standing Committee on Finance in late May 2020.
They also follow the Bank of Canada’s move to lower target interest rates—which influence mortgage rates and thus decrease the cost of borrowing—three times in March.
In his testimony to the Finance Committee, CMHC CEO Siddall warned that Canadians were already “among world leaders in household debt” before the pandemic, which is set to push indebtedness levels higher still. The combination of higher mortgage debt resulting from mortgage deferrals during the pandemic, together with CMHC’s forecast of declining house prices and increased unemployment “is cause for concern for Canada’s longer-term financial stability,” he added—making the rule changes necessary.