CMHC changes have occurred again – and its not good news for you

On June 27 CMHC changes were announced that affect the Canadian mortgage lending rules and were primarily designed to make is more difficult for clients to qualify for their new home purchase.  There were about nine changes announced however I have included below the three most important along with my thoughts in Italics.

• Unsecured credit lines & credit cards: For these debts, “No less than 3% of the outstanding balance” must be included in monthly debt payments. Interest-only payments are no longer considered on credit lines. Furthermore, lenders must assess the borrower’s credit history and borrowing behaviour when determining the amount of revolving credit that should be accounted for in debt ratios.

Whoa – lenders must assess the borrowers borrowing behaviour to determine the amount of credit to be accounted for in ratios?  This is a very slippery slope – for example lets say you have a $10 000 credit card that is used for business purposes and is regularly repaid.  If your balance owing is zero but you have the wrong person assessing your debt ratios they could start imputing an additional $10 000 debt which means that they will calculate an additional $300 into your monthly payments for an account that you always pay!  This is a typical CMHC and government ambiguity that shows, in my opinion a lack of understanding.

Second Whoa – if clients previously had an unsecured line of credit that had provable interest only payments we could use these payments in the debt ratio – now it is 3% of the balance.  This is a huge difference, for example previously if a client had a $10 000 line of credit we could use a payment of $50, now this payment is $300 – a 600% increase.

• Secured lines of credit: Lenders must factor in “the equivalent” of a payment that’s based on “the outstanding balance amortized over 25 years.” That payment must use the contract rate (of the LOC) or the 5-year Benchmark rate (V121764) published by Bank of Canada (if the contract rate is unknown). Again, interest-only payments are no longer allowed for debt ratio calculation purposes.

For CMHC mortgages this is not as big of a concern as most clients who are purchasing a home with 5% down payment won’t be accessing funds from a secured line of credit.  HOWEVER where the CMHC changes can become a very dangerous slope is if mainstream lenders start using this for conventional mortgages.  For example if a client is buying a rental property with 25% down payment for $300 000, the line of credit payment is $219, however if we have to qualify at the new CMHC requirements the payment will be $375, or 58% higher.

• Heating costs: Lenders must now obtain the “actual heating cost records” of a property. When no such history is available, the heat expense used in debt ratio calculations “must be a reasonable estimate taking into consideration factors such as property size, location and/or type of heating system.” That’s why some lenders have now moved to a set heating cost formula, like:
  (square footage x $0.75) / 12 months

These CMHC changes in underwriting will increase debt ratios for many purchasers however the increase will probably not be dramatic.  For example on a typical 2400 sq foot home right now we would use $75 for a heat cost, the same heat cost under the new formula will double to $150.  This is a dramatic percentage change however it is still only a $75 a month change, or the equivalent of a $2500 credit card debt payment.

 My thoughts on the CMHC changes

These changes separate from one another are probably not a deal killer for many Canadian home buyers, however when we combine the CMHC changes of increasing the unsecured debt calculation, increased secured debt calculation, AND increased heat calculation, this can be very harmful to many Canadians.  Within a historical context, these changes come on the heels of decreased amortizations and higher mortgage qualifying rates that were previously imposed by the government.  The government, through CMHC is essentially trying to close the various loop holes and areas of discretion that lenders have used for years to differentiate themselves within the mortgage market.  For example some lenders have always used 3% repayment as a calculation on unsecured revolving debt where as many major lenders have used the exact payment, whether it be interest only, 3%, or another amount.  It is important to realize that these government manipulations that we have experienced for the past several year, ranging from these new changes, to restricting the amount of refinancing clients can do, to eliminating many self employed lending programs, are NOT a result of high defaults or based upon ANY real factual default data.

These restrictions that in many cases have hurt Canadians have been a ongoing part of the Government’s desire to have increased control in the Canadian mortgage markets.  In fact I was told when inquiring about some of CMHC’s recent questionable underwriting decisions that the underwriters are basically constantly looking over their shoulder and are running scared from OFSI (the government regulator) who has recently established an office within CMHC’s underwriting centre.  These unwelcome CMHC changes and challenges should come as no surprise given the current government stance and high involvement.

As a mortgage broker our role with our clients is to work closely with them to maximize their selection, ensure excellent mortgage rates, and at the same time ensure their mortgage matches their needs and goals – both short and long term.  I always work to be very honest with our client’s about the various industry ins and outs and work to ensure they understand the pros and cons with their mortgage options.

For any mortgage questions and needs and to see if these CMHC changes affect your future purchase please feel free to email or phone me – Rylan