CMHC reverted to its earlier standards after losing market share for the past 12 months. It came as a bit of a shock when Canada Mortgage and Housing Corporation (CMHC) tightened its underwriting criteria in July of 2020.
Not because the pandemic-fuelled housing frenzy didn’t deserve a more cautious approach from the nation’s three mortgage default insurers, but because CMHC was the only one that acted.
“We felt these changes would protect homebuyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable price growth,” CMHC said in a press release.
After a year of losing market share to private competitors Sagen and Canada Guaranty, CMHC announced July 5 that it would reinstate its previous, less stringent underwriting guidelines, letting Canadian homebuyers be more easily approved for mortgage insurance through the government-backed institution.
But will the change make buying a home any easier?
Insurance is a big piece of the mortgage puzzle in Canada. If you can’t come up with a 20% down payment, you’re required to purchase insurance against the possibility of defaulting on your mortgage.
And mortgage insurance isn’t automatic. Insurers need to sign off on a mortgage application for it to cross the finish line. That’s why they have their own underwriting criteria.
Prior to July 1, 2020, CMHC and its two non-government competitors had similar underwriting standards, including:
GDS refers to the proportion of housing debt borrowers pay compared to their income. TDS is the proportion of gross income that is already allocated to housing-related and other kinds of debt.
After July 1, 2020, CMHC’s new guidelines were adjusted as follows:
With Canada Guaranty and Sagen standing pat with their own underwriting criteria, CMHC’s stricter guidelines sent a wave of new business to the private mortgage insurance space. In the first quarter of 2021, Sagen’s net income was up 41% year-over-year.
Sensing how much market share it was losing, CMHC had little choice but to return to its previous underwriting standards.
There is really only one way CMHC’s recent tweaks might help you get into a home if you couldn’t before, and it’ll require a very unlikely scenario.
You’ll have to have aligned yourself with a mortgage broker who has severely limited relationships with lenders — so limited that these lenders only work with CMHC on mortgage-insurance matters. It’s hard to imagine a lender staying in business for long with such a limited business model.
Still, if you’re actually in this situation, and being denied CMHC mortgage insurance for the last 12 months has been the only thing preventing you from getting your mortgage approved, then buying a home did just get easier for you.
Realistically, though, lenders who couldn’t get CMHC to insure their deals in the last year simply sent them off to Sagen and Canada Guaranty.
Based on the record number of homes sold in 2020 — and in the first half of 2021 — one insurer changing its underwriting guidelines appears to have little effect on Canadians’ access to, or demand for, mortgages.
Expect a similar result this time.
The content provided on Myfinancesguru.com is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.
