House building and city construction concept evening outdoor urban view of modern real estate homes
© scanrail / 123RF Stock Photo

The Canada Mortgage and Housing Corporation (CMHC) is tightening its lending standards, making it tougher for Canadians to borrow money to purchase a home.

The country’s national housing agency says it’s changing the credit score needed to get mortgage insurance to 680 from 600 and limiting the gross and total debt servicing ratios to 35% and 42%, respectively. These figures were 39% and 44% previously.

CMHC will also ban potential buyers from using such sources as unsecured personal loans or unsecured lines of credit to make down payments.

CMHC says the changes will be effective on July 1 and are accompanied by the suspension of most refinancing for multi-unit mortgage insurance.

The moves come just over two weeks after CMHC chief Evan Siddall appeared before the finance committee in Ottawa, forecasting a decline of between 9% and 18% in average house prices in the next year.

He warned a growing debt deferral cliff could be headed Canada’s way in the fall, when some unemployed Canadians will need to start paying their mortgages again, and said as much as one-fifth of all mortgages could be in arrears if the economy has not recovered sufficiently.

In a report on Friday, TD Economics said the new measures could amplify the impact of the existing stress test for insured mortgages, by causing borrowers to “bump up against maximum allowable debt service ratios faster.”

At the same time, the impact of the new measures will be mitigated by lower interest rates, it said.

First-time homebuyers are expected to be most affected, as they’re more likely to take out insured mortgages.

TD Economics also noted a potential workaround of the rules: using private insurers. “There appears to be no word yet on whether these lenders will match the rule changes,” the report said. “If not, this could provide a leeway for buyers who don’t qualify with CMHC.”

Those in the market for a home who will be affected by the new rules may also consider buying this month to get ahead of the July 1 implementation date.