Canada Mortgage and Housing Corporation (CMHC) has released their 3rd quarter results, and they indicate Canadian home buyers are doing a better job of managing their mortgage debt. The Crown corporation, which offers mortgage loan insurance and securitization guarantee programs, finds the new average buyer credit score and debt service ratio are on an uptick.
Improving Credit Scores for Canadian Home Buyers
CMHC found the average credit score for transactional homeowner loans in the third quarter was 747. This is an excellent score and shows that homeowners are doing a good job of managing their debts. Maintaining a good credit score is important if you plan to borrow money for a major purchase like a home, and generally the better the score, the better your mortgage rate. According to Equifax and TransUnion, Canada’s two credit monitoring agencies, a score of 600 to 749 is considered good, while a credit score of 750 and above is great.
Buyers Better Able to Handle Mortgage Debt
CMHC also found the average gross debt service (GDS) ratio for transactional homeowner loans in the third quarter was 25.7 per cent. This is an excellent number and falls well below the industry standard of 32 per cent. The GDS ratio is used by lenders to determine how much you can afford to borrow, and refers to the percentage of gross annual income needed to cover payments associated with housing, including mortgage payments, interest, property taxes, heating, and 50 per cent of your condo fees (if applicable).
Check out the First Time Home Buyer’s Guide for more information on your GDS and TDS ratios>
High Ratio Mortgage Lower – But Not Everywhere
The average high-ratio mortgage amount for transactional homeowners was $251,262 in the third quarter. However, with a wide disparity in real estate prices across the country, this doesn’t paint a fair picture in the size of mortgages homeowners are taking on; for example, in the priciest real estate markets like Toronto and Vancouver, homes clock in at over $1 million compared to more affordable markets like Atlantic Canada.
Fewer Mortgage Defaults
Fewer homeowners with mortgage insurance are defaulting on their mortgages. The overall arrears rate was only 0.35 per cent for the third quarter. Meanwhile, total claims paid in the third quarter was $76 million, $38 million less than the same period last year. CMHC attributes the drop in claims to the timing of payment processing. When we look at the big picture, the total number of loans in arrears is slightly lower at 3.8 per cent compared to the end of 2014.
Efforts to Reduce Taxpayer Exposure
Because the CMHC is a Crown Corporation, it’s funded by taxpayer money – meaning, any defaults it absorbs come out of taxpayer pockets. To help limit the exposure of Canadian taxpayers to a housing bubble, the former Conservative government imposed a $600 billion limit on mortgage insurance. Total insurance-in-force was $525 billion, $18 billion less compared to the end of 2014. This is inline is CMHC’s expectation for this number to gradually fall.
However, a recently revealed letter to the CMHC from the Canadian Bankers Association casts doubt on whether this is the right move as it increases the pressure on Canadian banks, and weakens Canada’s overall financial stability.
The letter states, “As the CMHC explores options to reduce the federal government’s exposure to the housing market, we would like to ensure that any changes made to the housing finance system are done so with a complete understanding of their implications on the housing and mortgage markets,”