Mortgages has become harder to obtain – how to find alternatives to the rules
It’s a lot harder to get the feds to back your mortgage than it was a few months ago.
Effective July 1st, 2020, the Canada Mortgage and Housing Corporation (CMHC) has reduced borrowing limits, demanded higher credit scores, and restricted down payments for anyone who needs default insurance — which is mandatory for buyers that plan to put less than 20% down on a home, or “high-ratio” buyers.
The tighter lending rules are making it difficult for some Canadians to take advantage of record-low mortgage rates, but mortgage pros say there’s a “secret” way around it.
What are the new rules?
The CMHC’s new rules are meant to steady the economy in the wake of the coronavirus by controlling debt and protecting lenders from people who pose a high risk of defaulting.
Homebuyers seeking a high-ratio mortgage are no longer able to submit a down payment with money borrowed from credit cards, unsecured personal loans or lines of credit.
Only “traditional sources” of cash, such as savings, equity from the sale of a house or financial support from relatives will fly.
Here’s a quick breakdown of what else has changed:
Credit Score Before July 1, 2020 After July 1 , 2020
|Minimum credit score||600||680|
|Spending cap||39% of your gross income||35% of your gross income|
|Borrowing cap||44% of your gross income||42% of your gross income|
If you feel intimidated by the 80-point jump in credit score requirements, go check your credit score for free (don’t worry, checking doesn’t affect your score). If your score is too low, there are simple steps you can take to improve it.
You’ll also only be able to spend up to 35% of your gross income on housing — including your mortgage, property taxes and utilities — and borrow up to 42% of your gross income, which includes your other loans and credit. Basically, your purchasing power as a potential buyer has been cut by up to 12%.
How homebuyers can get around the rules
It’s important to remember that, if you’re not a risky borrower in the eyes of the CMHC, these changes may not affect you at all.
“They are impacting a subset of borrowers who need mortgage insurance,” says Toronto-based broker Sean Cooper, author of the book Burn Your Mortgage. Even those homebuyers, he says, “still have options.”
If you’re one of the Homebuyers excluded by these changes, you should look around for a lender that works with Genworth or Canada Guaranty, the country’s two private-sector providers of mortgage default insurance. Both have decided not to tighten their restrictions.
“They are usually lockstep with the CMHC, so this is definitely out of the ordinary,” says Cooper.
Getting your insurance through one of these companies will allow you to get around the new rules so that even if the CMHC deems you high-risk, you can still find a range of lenders willing to help you lock in a mortgage at one of today’s ultra-low rates.
Is everyone affected?
The other good news is that the new lending rules don’t impact existing homeowners who want to take advantage of historically low rates by refinancing.
“As of right now, the rules haven’t changed for refinancing,” says Cooper. “The fact that Genworth and Canada Guaranty didn’t match the CMHC’s changes makes me think that there’s less likelihood of more changes in the future.”
Mortgage rates are predicted to stay low for at least 12 to 24 months, until the economy starts to stabilize from the COVID-19 crisis.
That means there’s no better time to see how much you can save on interest and your monthly mortgage payments. Refinancing now could save you hundreds of dollars a month and allow you to hold on to more cash during this time of financial uncertainty.
Whether you’re buying or refinancing, it pays to shop around and get the best deal.
Source: Financial Post
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