Canada’s housing agency has drawn criticism for its move to tighten mortgage qualification rules for high-risk borrowers amid the economic downturn caused by the coronavirus pandemic.
The Canada Mortgage & Housing Corp. (CMHC), which offers default insurance to home buyers with low down payments, said it will tighten mortgage eligibility criteria as of July 1. Going forward buyers will need higher credit scores and lower debt to qualify for a mortgage, the agency said.
Evan Siddall, CMHC’s Chief Executive Officer, said the move will protect new home buyers from falling prices and reduce taxpayer risk in the event of a major market correction.
Critics were quick to pounce, though, saying the changes could slow housing market activity just as the federal government and Bank of Canada have been flooding the economy with hundreds of billions in cash to help fuel a recovery.
Among the rule changes, a borrower’s maximum gross debt service ratio -- the share of income that goes toward paying all housing costs, including mortgage, taxes and heat -- can’t exceed 35%, down from 39% previously. In addition, mortgage holders must have a credit score of 680 or higher, meaning at least an average credit rating. That’s up from a credit score requirement of 600, which is considered below-average.
Seeking to curb the practice of borrowing money for down payments, the housing agency also said unsecured personal loans and unsecured lines of credit will no longer be treated as equity for insurance purposes. In addition, CMHC suspended refinancing for multi-unit mortgage insurance, except when the funds are used for repairs or reinvestment in housing. And, all home buyers who have less than a 20% down payment will be required to purchase default insurance.
