Who will be hit the hardest by CMHC’s new minimum credit score?

As many other announcements from the Canadian Mortgage and Housing Corporation (CMHC), the introduction of new rules for insured mortgages caused a wave of criticism and anxiety. One of the changes, taking effect on July 1, led to particular concerns – raising the minimum credit Beacon score from 600 to 680.

“The credit score isn’t a perfect measure, as it doesn’t show the entire picture,” – noted economist Dr. Sherry Cooper.

“The deal is that it really doesn’t have anything in common with your income or wealth. In case you have a lot of credit available to you on cards, but you even don’t use it, your credit score still goes down”.

Meanwhile, Matt Fabian from TransUnion sees it in a more dovish way.

“In my opinion, it’s not a significant or controversial change,” – he says, “as if you look at the total number of mortgages tracked, only about 8% are under 680. And many of them showed higher than 680 numbers at the time of origination”.

According to Fabian, only a very small share of mortgages involves borrowers with a sub-680 Beacon score. And often they involve manual overrides, high down payments or other fiscal gymnastics from brokers.

However, Fabian still thinks the timing of introduction is wrong.

“I can’t see how it could help when we see a significant decline in the origination caused by the crisis and lockdown,” – he says. “Moreover, the other two large insurers (Canada Guaranty and Genworth) decided not to follow the example”.

Although the new minimum credit score was increased by more than 13%, Fabian doesn’t expect a strong influence on many potential buyers.

“It’s a serious change, but I don’t think it will affect a large number of the mortgage population,” – he noted, adding that 5-10% of all mortgage applicants will be pushed out of the market by the stricter rules.

The deal is that not only borrowers with poor credit scores will be affected. The same will happen to those with short credit histories. They include two important groups of potential buyers: millennials and new immigrants. The former represents one of the biggest population demographics in the country, while the latter accounts for Canada’s population growth, diversity and economic might. And starting July 1, both groups will be hit by the new rules.

Luckily, according to Fabian, consumers with the scores below 680 can increase them relatively easily. They need to make their payments in time and monitor their credit.

“Consumers will not have to make a giant leap to improve their situation”, – he noted. “Just in a quarter, we’ll see about 15-20% of consumers going up in risk tiers.”