Ottawa’s latest round of mortgage policies could have quite the impact on current homeowners, especially those shouldering a large amount of debt. If you have a mortgage and are planning to refinance or renew in the coming months, you could be in for a bumpy ride. The two factors that will most impact your experience? Whether or not you plan to change your mortgage and your mortgage qualifications.
Scenario #1
Let’s pretend that your mortgage is coming up for renewal. You’re pretty happy with your current level of risk, so let’s assume that you don’t want to raise the mortgage amount, amortization, or loan-to-value ratio. Let’s also assume that you’re in good standing and are happy with your current lender.
In a case like this, you can simply renew for the best mortgage rate and be done with it. Nearly 78 percent of homeowners follow this course of action, blindly assuming that their bank’s rate is the best available option.
Scenario #2
This time, let’s pretend that you want to switch lenders. In most cases, you should be able to keep certain mortgage features. For example, most lenders will take in a conventional mortgage as-is, even those with long amortization periods. The only time you might run into problems is if your mortgage is tied to a line of credit and the risk cannot increase. It’s an increase in risk that will cause most homeowners to run into barriers under the new mortgage rules.
When Trouble Arises
Here are a handful of renewal scenarios where locking in a great mortgage rate might be harder than you think:
1) HELOC Help
Let’s pretend you’ve got a home equity line of credit (HELOC) that enables you to borrow 66 to 80 percent of your home value. You’ve decided that you want to either, 1) change your HELOC to a new lender, 2) add a new mortgage portion or c) increase the borrowing limit.
Any one of these changes could cut back your 66 to 80 percent revolving credit line to the new maximum of 65 percent.
2) Home Improvement Problems
If you’re considering rolling high-interest debt or home improvement costs into your mortgage at the time of renewal, be careful. If combining the costs would require an insured mortgage greater than 80 percent of your property value, you might be out of luck. Your only options will be to either:
- Apply for a more costly cash-back mortgage up to 85 percent of your property value
or, - Apply for an even costlier non-prime mortgage up to 85 percent of your property value
or - Apply for a second mortgage from an alternative lender.
3) The Five Year Fix
In this scenario, you’re up for renewal and you have 20 percent or more equity. You’re hope is to land a variable rate or a 1- to 4-year fixed term agreement. Unfortunately, you’re income has either dropped or you’ve taken on some hefty debts, making it so you can no longer afford the payments at a 5-year posted rate. (This rate is becoming the mandatory “qualification rate” for all uninsured borrowers with a variable rate or 1- to 4-year fixed.)
Unfortunately, chances are good you’re going to be forced into a 5-year fixed rate because it’s the only term you’re going to qualify for. The reason for this is policy based. The government allows lenders to “test” a borrower’s payment ability at his or her actual rate if the term is fixed at five years or more.
It’s important to note that in most of these situations, marginal borrowers are the ones being restricted. This isn’t necessarily a bad thing. Ottawa’s latest set of rules are intended to help reduce consumer debt levels, after all.
If you require assistance with your upcoming mortgage refinance or renewal, don’t hesitate – contact a mortgage broker at FamilyLending.ca for assistance.