At the end of last week CMHC announced they would lower their debt ratios limits on insured mortgages reducing an applicant’s borrowing power, so not what we would want going forward.
Debt Ratios Explained:
When qualifying for a mortgage there are two debt ratios that a lender and insurer use to see how much an applicant can borrow.
GDS: which on insured mortgages is currently 39% of gross income includes the monthly mortgage payment, property taxes, heat, and condo fees (if any) and cannot be more then 39% of an applicant’s gross income.
TDS: is the same as GDS but will include other monthly debt payments such as car loans, credit cards etc. This currently cannot be more then 44% of applicant’s gross income. Once an applicant reaches either of these debt ratios, they have reached there maximum borrowing power.
The impact of CMHC lowering there debt ratios to GDS 35% and TDS 42% is roughly $30,000.00 in mortgage. So, someone able to borrow $500,000.00 is now reduced to $470,000.00 using CMHC guidelines.
It is not all doom and gloom. Right now, there are three insurers in Canada, CMHC, Genworth and Canada Guaranty. The other two insurers have not to date made any changes. Not all mortgage lenders use CMHC and some use two or all three insurers so that is why working with a mortgage broker makes sense to make sure your mortgage is submitted to the right lender and insurer allowing the maximum borrowing permitted.
This change is for CMHC Insured mortgages only so does not include refinances where one takes out new money, 20% or down payment on conventional mortgages or any mortgage outside of insurers guidelines.
Please do not hesitate to reach out with any questions.