OTTAWA (CU)_In July last year, the Canada Mortgage and Housing Corporation (CMHC) decided to change its underwriting criteria for mortgage loan insurance, limiting the gross debt service ratio to 35 per cent and the total debt servicing ratio to 42 per cent, while increasing the required credit score when seeking insurance to 680. Here, the maximum gross annual income which can be used for mortgage, condo fees or heat, and other home-related expenses are referred to as gross debt service while this, combined with other monthly debt payments on vehicles, credit cards, is considered to be total debt service.
The move was aimed at reducing government and taxpayer risk, while protecting homebuyers amid excessive demand and unsustainable price growth in the housing markets during the pandemic. However, these changes were proven to be ineffective as the CMHC lost its market share. Accordingly, the federal housing agency has now decided to ease the underwriting criteria, considering gross and total debt servicing ratios of up to 39 and 44 per cent respectively, for borrowers with a history of strong management of payment obligations. On the other hand, the credit score for at least one borrower or guarantor has also been brought down to 600.
“We are taking this action because our July 2020 underwriting changes were not as effective as we had anticipated and we incurred the cost of a decline in our market share,” CMHC said in a statement. However, the agency did not reveal how much of its market share was lost and to whom it was lost.
According to experts this reverse in policy would not have a significant impact on consumers since the requirements entirely focus on insurance that lenders obtain. When the CMHC tightened its requirements last year other options were available for consumers from rivals such as Canada Guaranty and Sagen, James Laird, co-founder of Ratehub.ca, said. “When one company has tougher underwriting criteria than their two competitors, then naturally the market starts to use the two competitors, much more,” said pointed out.
