Mortgage Renewals Now More Costly — For Those Least Able to Pay

One in four borrowers will renew their mortgage this year, estimates the Bank of Canada.

Some of them are about to find renewing a whole lot trickier and potentially more expensive — thanks to two important rule changes:

#1.  The Much-Publicized Stress Test

As most of you now know, on January 1 the government (OSFI) made it harder to get a mortgage. It mandated that federally regulated lenders make all borrowers prove they can afford mortgage rates that are at least two points higher.

This test applies to new and existing homeowners alike — even those who have never missed a payment and simply want to change lenders for a better rate. People remaining with their existing lender are not subject to it.

Based on what we’re hearing from banks, roughly 6% to 12% of renewers are trapped by the stress test, meaning they can’t switch lenders to get a better rate, even though doing so poses no additional risk to the system.

OSFI Mortgage Stress TestOSFI has taken heat for applying this rule to such mortgagors because being pushed into higher rates heightens borrower risk.

OSFI’s answer to us:

“…When a customer chooses a new financial institution for their mortgage, a new mortgage contract is signed; therefore the rules for underwriting a new mortgage apply. This represents a new relationship between the financial institution and the customer (who has no credit history at the new financial institution).”

With all due respect, that is weak justification. Every borrower’s credit history is well known to the lenders they apply to, simply because all prime lenders pull credit reports on their borrowers.

OSFI could easily choose to protect such borrowers (and their lenders) by exempting renewers with good credit from the stress test. Heck, the Department of Finance (to whom OSFI technically answers to) has a similar grandfather clause already. CMHC has confirmed it, saying: “the mortgage rate stress test requirement does not apply to loans insured prior to October 17, 2016” that switch to approved lenders and don’t entail an increase in loan amount or amortization. So there is definitely precedent for not imposing the stress test on existing borrowers.

According to Mortgage Professionals Canada’s Annual State of the Residential Mortgage Market survey, between 50,000 and 100,000 homeowners with mortgages renewing “may find themselves vulnerable” during the renewal process and be unable to negotiate with other federally regulated lenders.

“In some cases, these renewing borrowers may be forced to accept uncompetitive rates from their current lenders,” the report’s author, Will Dunning, wrote.

For those who can’t pass the government’s stress test, many now have little choice but to stick with their existing lender and pay above-market rates. While anecdotal thus far, we’ve personally seen half a dozen cases where clients who have paid as agreed, but have higher debt ratios, are being quoted above normal rates by their bank.

“There is a tiny media trickle developing that the Feds may be out to lunch on the mortgage file,” says mortgage broker Ron Butler, of Butler Mortgage. “A few widows and single moms in Nova Scotia and Saskatoon saying their banks won’t renew them after 15 years of perfect payment could turn that trickle into a wave.”

#2. IFRS 9 is Here

On January 1, 2018, the IFRS 9 accounting standard took effect. In short, it means banks must now set aside additional reserves for mortgages that demonstrate significant increases in potential credit risk. This could impact roughly 5% to 10% of existing bank borrowers, said one bank exec we spoke to.

IFRS 9 requires institutions to reassess a loan’s credit risk periodically. That means many lenders will be re-evaluating borrowers’ credit and loan-to-value (likely using automated valuation methods) at renewal.

In the past, paying as agreed and negotiating was usually enough to get you a decent renewal rate from your existing lender. That’s no longer true for what could potentially be one in ten existing borrowers.

Now, if you’re with a mainstream lender and your financial picture deteriorates significantly, a perfect repayment history and good negotiating aren’t enough. Expect the possibility of a less stellar rate because you’re now a more costly borrower for your lender, even if you’ve never defaulted.

This trend will result in more borrowers trying to switch lenders at renewal. Unfortunately, as we wrote above, the stress test will put the kibosh on that for many.

What to Do if You Can’t Pass the Stress Test

Homeowners stuck with crapola renewal rates first must consider whether they can qualify under the new stress test. Here’s a calculator where you can do that. It helps you compute your debt ratios, upon which the stress test is based.

When using this calculator, make sure your:

Renewers who can’t pass the stress test have little choice but to swallow their current lender’s subpar rate or find a lender (e.g., a credit union) that qualifies borrowers at or below the contract rate. Any good mortgage broker can help you find these lenders but expect to pay a rate premium for this flexibility.

In sum, borrowers who can’t pass the stress test will be lucky to get average rates going forward, and potentially be staring at a 10 to 40+ bps surcharge above average market rates.

To put that in perspective, a rate just 25 bps higher than the best market rate would cost a homeowner $2,300 in additional interest over five years on a typical $200,000 mortgage.

If You Can Pass the Stress Test, There Are Options O’Plenty…

For well-qualified borrowers, the strategy hasn’t changed:

1. Start your negotiations early

Start shopping other lenders for a better rate at least 90-120 days before your mortgage matures. That’s how long most long-term rate guarantees last.

This gives you time to get quotes, which you can bring back to your lender and use as negotiating leverage. (Assuming you’re satisfied that your existing lender has the best mortgage product.)

The further in advance you negotiate your renewal rate, the more you’re protected if rates rise. If rates fall you can simply renegotiate a better deal.

2. Never accept your lender’s first offer

That’s especially true if it’s the lender’s posted rate. Renewing at posted is the cardinal mortgage sin. Posted rates are paid by practically nobody but the uninformed and the underqualified.

The truth is, if you don’t come out and ask for a better rate, you’re not going to get one. If you’re willing to transfer over other banking or investment accounts, a lender may be even more willing to play ball and lower your renewal rate.

3. Do your homework

Getting a lower quote is easier if the lender thinks you’re rate savvy. Show your lender that lower rates are being offered by their competitors. Mortgage rate comparison sites (like that of your friends at RateSpy) are superb places to find and compare deals.

For example, the lowest 5-year fixed rates tracked by the Spy are currently 2.99% or less. Compare that to the leading Big 6 banks’ 5-year fixed at 3.19%, and the average bank rate of 3.44%.

4. Exhaust all of your non-rate options

Don’t fixate on the rate alone. Rate features and restrictions can make all the difference in your overall borrowing cost. Think carefully about the features you absolutely need and are willing to pay extra for. Ability to refinance cheaply before maturity, porting flexibility and fair prepayment penalties can save you three to five times a small rate savings. Don’t dismiss this fact.

5. Take the plunge and change lenders

Few relish spending the time to start a new lender relationship. But if you can save a quarter point by switching a $200,000+ mortgage, with minimal fees, those few days of your life that you invest in switching lenders is well worth it.

6. Let a mortgage broker do the dirty work

If you’re a hands-off sort of borrower, you may find comfort in turning to the services of a mortgage broker. Not only will they handle the negotiating on your behalf, but they often have a few tricks up their sleeve to get you better terms than you can get on your own, especially if your debt ratios are high.

7. Get credit-ready in advance

If you’re facing renewal in 12 months but have a credit score under 700, do your best to get above that number. Avoid missing payments, keep all revolving credit accounts below 70% utilization, raise your available credit (if possible and if you’re disciplined) and correct any errors on your credit report. This lowers the chances that your lender deems you a higher credit risk at renewal.



5 Comments

  • While a lender may be able to refresh a bureau, they can’t fully re-adjudicate without a new application.
    They won’t know if you pay card balances in full each month, so they’ll probably add 3% of the last reported balance to your DSR.
    Clients should use their right to privacy to their own advantage. If you don’t get a good renewal offer, tell your bank you will be applying somewhere else. Show them posted rates from HSBC, TD, and BMO, so they know you are serious.
    While I agree renewals should be exempt from B20, I think the issue is not serious. And if it forces a few people on the margins to cut up their credit cards or pay off their car loan so they can get their TDS under the B20 limit, then that is a good thing.

  • Banker says:

    To Ralph:

    Lenders don’t need to fully re-adjudicate a loan to recognize it as underperforming, referred to as “stage 2” under IFRS9. Much can be gleaned from the customer’s credit bureau which banks must now pull periodically.

    As just one example, IFRS9 states that “credit risk has increased significantly when contractual payments are more than 30 days past due.” A lender must provision for loan losses over the LIFE of the mortgage in that case. Banks must then assess the ongoing probability of default by accounting for current and future economic conditions. This is a radical departure from the prior IAS 39 accounting standard.

    Banks are now incorporating all of this into their pricing models. While I don’t expect the consumer impact to be extreme, there will be an impact.

    As for adding 3% of unsecured debt balances to debt service ratios, all major banks in Canada already do this.

  • To Banker:
    3% of the last reported card balance doesn’t get added when you pay the full balance every month. A mortgage rep will confirm that, but an automatic review based on a bureau refresh won’t be able to account for that.

  • Realist says:

    “I think the issue is not serious. And if it forces a few people on the margins to cut up their credit cards or pay off their car loan so they can get their TDS under the B20 limit, then that is a good thing.”

    To think B20 has a significant deterrent effect on over-indebtedness is little more than a pipe dream. People who overborrow do it because of adverse life events or because they’re conditioned to live beyond their means. Borrowers with a TDS over 40% require credit to survive. It’s not optional. These people don’t have heaps of cash lying around to “pay off” car loans at will and they sure as hell don’t “cut up” anything if they can help it.

  • Jen says:

    Whether you carry a balance all the time is already factored into the credit score. Maybe banks will monitor credit more frequently going forward?

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