It Will Soon Be Harder to Buy a House in Canada

The housing industry is suffering alongside many other sectors in Canada. In order to reduce risk and protect home buyers, CMHC has revised its underwriting criteria.

House Key And Keychain On Wooden Table

Image source: Getty Images

Canada Mortgage and Housing Corporation recently announced changes in its underwriting policies that will make it harder for home buyers to qualify for a mortgage in the future. CMHC stated that the reasoning behind rolling out these changes is the expected home price reduction that the market is likely to see in the aftermath of COVID-19.

CMHC’s announcement about new underwriting rules has not been met with warmth in the industry. Two major private insurers declared that they wouldn’t be following CMHC’s lead and changing underwriting requirements for their borrowers.

New underwriting rules

The changes CMHC announced regarding new home applications (effective July 1) are significantly stricter than before. The GDS/TDS ratio has been changed from the previously lenient (39/44) to a relatively stricter (35/42).

The minimum credit requirement has also been pushed up from 600 to 680. Down payments from non-traditional sources (a loan, for example) that increase the debt burden of the home buyer are no longer acceptable.

CMHC claims that these changes are made to protect prospective home buyers and reduce risk. While these new requirements will certainly reduce the insurance risk for the company, they will also cut the potential home buyer pool substantially. Many home buyers that would have qualified for a mortgage before won’t be able to do so with these rules in place.

For a company that is aiming for 100% homeownership in the country by 2030, this move seems rather counterproductive. But that’s actually in line with CMHC’s debt management policies. Two private insurers, including Genworth MI Canada (TSX:MIC), have declared that they won’t be adopting these new underwriting rules, and will instead rely upon their existing model.

A private insurance company

The Genworth stock had a pretty decent run before the crash. It grew over 85% in the past five years (before the crash). Genworth is also a Dividend Aristocrat with a growth streak of 11 consecutive years. The company has a market cap of $3.2 billion, the total debt of $747 million, and a cash pile of $373 million.

The housing market was hit pretty hard in the pandemic, which is reflected in the stock price depreciation of Genworth. The company is currently trading $37 per share, about 36% down from its pre-crash value.

This makes it one of the most discounted stocks in the financial sector. The low valuation has also pushed the dividend yield to 5.83%, with a safe payout ratio of 43.66%.

According to the first-quarter results, the company grew its net operating income (by $5 million) and managed to maintain its premium earned, compared to the last quarter. The company also provided two generous special dividends to its investors this year.

Foolish takeaway

The strict underwriting policy is expected to have two effects — the first is that prospective homeowners that now don’t fit the requirements for mortgage approval may stay away from the market for a while (or seek mortgage institutions that will be willing to lend to them).

As well, many prospective buyers might start converging on the housing market before the new underwriting rules take effect.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned.

More on Dividend Stocks

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Royalty: 3 Fabulous Stocks to Buy Now for Decades of Passive Income

Rogers Communications stock and Canadian Natural Resources stock could pay you dividends for decades to come.

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in April 2024

For growth and dividends this April, look to these two REITs that have quite the promising present as well as…

Read more »