Housing agency tightens Canadian mortgage rules amid downturn

[OTTAWA] Canada's housing agency is tightening rules to make it more difficult for higher-risk borrowers to qualify for mortgage insurance.

As of July 1, homebuyers will need to have a higher credit score to qualify for default insurance, Canada Mortgage and Housing Corp (CMHC) said Thursday in Ottawa. In addition, a borrower's maximum gross debt service ratio - the share of income that goes toward paying all housing costs, including mortgage, taxes and heat - can't exceed 35 per cent, down from 39 per cent previously.

The agency also said it would work to curb the practice of borrowing money for down payments. In addition, it suspended refinancing for multi-unit mortgage insurance except when the funds are used for repairs or reinvestment in housing.

CMHC expects prices to fall, and the agency doesn't want new borrowers to get underwater on their mortgages, according to Rob McLister, founder of RateSpy.com, a mortgage comparison website that first reported the rule changes. However, the changes coming in the middle of the biggest ever economic contraction could hamper any recovery, he said.

"The biggest risk is the hit to market psychology due to the timing," Mr McLister said in an email. "Regulators usually make such changes when times are good, not when housing is teetering on the edge."

Evan Siddall, CMHC's chief executive officer, flagged the rule changes in May 19 testimony to lawmakers in which he said the combination of higher mortgage debt, declining property prices and increased unemployment is "cause for concern for Canada's longer-term financial stability".

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Mr Siddall, who steps down later this year, said a statement Thursday the move would "protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth".

All homebuyers who have less than a 20 per cent down payment must purchase default insurance. Government-backed CMHC is the primary provider, followed by Genworth MI Canada and Canada Guaranty Mortgage Insurance. It's unclear if the private firms will follow CMHC's lead.

BLOOMBERG