Are you looking to buy a home? Interest rates are at their lowest since 2010, and predictions abound on the fluctuation in home prices while the coronavirus pandemic plays out.
Over the past several years, the federal government has been tightening mortgage rules to try to limit how much debt Canadians take on.
The mortgage stress test is still in place. More recently, the Canada Mortgage and Housing Corporation (CMHC) announced new criteria for its mortgage default insurance, which you may need if your down payment isn’t large enough.
Here’s a basic overview of down payment requirements, mortgage default insurance, and the CMHC changes that take effect July 1, 2020.
- How big a down payment do you need?
Many people take out a mortgage — essentially a loan — when they purchase a home. But you can’t borrow 100% of your home’s value. You must pay down at least 5% for the first $500,000 of the purchase price and 10% for the portion of the price above $500,000 (for properties up to $1 million). For homes above $1 million, you need a minimum down payment of 20%.
- What is mortgage default insurance?
If you’ve met the minimum down payment requirements but have paid down less than 20%, you’ll have to get mortgage default insurance. This could cost between 2.8% to 4.0% of your total mortgage, plus tax. This amount can be added to your mortgage payments. Mortgage default insurance protects your lender (not you) against the risk of you defaulting.
- Who provides mortgage default insurance?
The major mortgage insurer in the country is the Canada Mortgage and Housing Corporation (CMHC), owned by the federal government. Genworth MI Canada and Canada Guaranty Mortgage Insurance Company are two private residential mortgage insurers.
- Is mortgage default insurance mandatory?
Yes, if your down payment is less than 20%, mortgage default insurance is mandatory. Lenders won’t approve your mortgage without it. Since homes above $1 million require a 20% down payment as the minimum, you would not need mortgage default insurance in those cases.
CMHC tightens criteria for mortgage default insurance
Effective July 1, 2020, the CMHC is implementing new criteria for mortgage default insurance, making it a little harder to qualify. Genworth, on the other hand, has announced that it doesn’t intend to change its underwriting policy.
New criteria for CMHC mortgage default insurance:
- You can’t borrow for a down payment.
Your down payment cannot be from borrowed funds, such as a line of credit. According to CMHC, about 15% of homebuyers have used borrowed funds in the past.
- You will need a higher credit score.
At least one borrower will need a minimum credit score of 680, up from 600. It’s worth noting that this new minimum will not likely be a big impediment: less than 6% of CMHC-insured mortgages had credit scores below 680 in the first quarter of 2020, though scores may have declined due to the pandemic. See MD’s article Boost your credit score: A primer for your medical career.
- You will need to meet lower debt ratios.
CMHC wants to see that you have enough income for the home purchase you’re making. Under the new rules, your debt as a percentage of income must be lower.
- The gross debt-service ratio (housing costs as a percentage of your gross monthly income) will fall from 39% to 35%.
- The total debt-service ratio (housing costs and other debts as a percentage of your gross monthly income) will fall from 44% to 42%.
Does buying a home make sense for you?
- Check out MD’s Mortgage Calculator to get an idea of monthly mortgage payments if you bought a home. Change variables like your down payment, the interest rate and the home price and see the impact on your payments.
- MD’s Rent or Buy Calculator factors in much more than the mortgage, to help you see what would make sense for your current situation.
- Use the Scotiabank eHOME online mortgage hub to get pre-approved, search for a home and get a mortgage approval all in one place, all online. For residents, fellows and new-to-practice physicians, the mortgage amount qualified for is based on estimated projected income.1 eHOME is not available in Quebec.
An MD Advisor* can help you with your budget and help determine how a mortgage will fit into your financial plan.
*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
1 The projected income is an average estimated amount based on available industry data and is subject to change. Your actual income may vary. Terms and conditions apply.
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The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.