Why this message to you today? To purchase a home today it is ideal to have a 20% down payment. If you don’t have a 20% down payment, then you must buy additional “mortgage insurance”. The primary mortgage loan insurer in Canada is the Canada Mortgage and Housing Corporation (CMHC). The rules to qualify for mortgage insurance have now been tightened, making it potentially harder to qualify for a mortgage for some Canadians.
What are the changes? Effective July 1st, the following changes will apply for new applications:
- Gross/Total Debt Servicing ratios will be limited to 35/42%: this is the relationship between your income and your loan payments. Do you know what your debt service ratio is today?
- A minimum credit score of 680 for at least one borrower. Do you know your personal credit score today?
- Non-traditional sources of down payment that increases indebtedness will no longer qualify as equity for insurance purposes.
- Financing for multi-unit mortgage insurance, except when funds are used for repairs or reinvestment in housing, has been suspended.
It is estimated that these changes may impact as many as 20% of Canadians who wish to apply for a mortgage. These changes may also play a role in stabilizing or reducing the price of real estate in Canada in the years ahead.
What is the cost of mortgage insurance? The CHMC website has several useful calculators to assist you with your questions. But to give you an example: A $500,000 mortgage with a $50,000 down payment (10%) will attract an insurance fee of approximately $14,000! This amount is then added to your mortgage, which in turn will increase either your payment or your amortization period. This is a very significant expense that should be avoided wherever possible.
So what does this mean when purchasing a home today? These changes mean that you need to ideally be more proactive in understanding your current credit rating and your needs when purchasing a home. To qualify for the 20% down payment it may mean that you need to purchase a smaller home. This is actually a very good thing to do as it will also help you to pay down the mortgage more quickly and build more equity into your home. It will be this larger amount of equity that will enable you to upgrade your home 7 to 10 years down the road into something larger that may be more applicable to your needs at that time.
The bottom line: Most major purchase decisions in our lives are complex. It is therefore best to take your time and do your homework, make sure you are clear on what you are wishing to accomplish, determine how much you are prepared to spend and make sure that whatever you spend doesn’t take away from your other personal, financial or lifestyle objectives.
Road To Mastery Principle: Something is only as good as to what you compare it to.