Switch Tricks (For a Better Deal)

Mortgage switchBig news here for people wanting to switch lenders with a mortgage that was previously refinanced.

Until recently, it hasn’t been possible to move your mortgage to a new lender and get ultra-low default insured rates if you had previously refinanced that mortgage. That was due to an interpretation of the insurance rules implemented by the Department of Finance in 2016.

But on April 30, all three of Canada’s default insurers sent lenders some relief, stating:

“After consultation with the Department of Finance and other mortgage insurers, it has been clarified that if a prior uninsured loan has already been advanced with an Approved Lender, the loan may be switched to another Approved Lender and insured regardless if the loan was originally a refinance, purchase or had an amortization greater than 25 years.”

In a separate written statement to this publication, CMHC added, “…A mortgage may be switched to another lender and insured regardless if the loan was originally a refinance or purchase transaction provided that the amount of the outstanding balance is not increased or amortization extended at the time of transfer to the new lender.”

This means almost any prime mortgage may now be switched from one lender to another and receive the lowest available insurable mortgage rates, provided there is no increase in risk. (i.e., provided the new lender does not refinance the mortgage).

Why It Matters

This tweak to the rules will save borrowers hundreds of millions of dollars over time. That’s because borrowers up for renewal, who have previously refinanced, now have access to the lowest mortgage rates in Canada for low-ratio mortgages (the lowest rates are generally insurable rates).

Here’s a quick example. Two weeks ago, someone who had refinanced could not have transferred their mortgage and received the lowest conventional variable rate (2.16%). Today they can. And doing so would save them almost 30 bps versus uninsured rates. That’s over $4,000 of savings over five years on a standard $300,000 five-year term.

Good News for People with LOCs

good newsEven collateral charge mortgages—e.g., a mortgage combined with a line of credit (LOC)—can now be switched to a new lender and qualify for low insured rates. The keys are that:

  • the new mortgage amount cannot exceed the total amount (of the mortgage and HELOC) at the previous lender
  • the amortization cannot be increased at the time of transfer, and
  • the amortization cannot exceed 25 years.

Note that you’ll usually (not always) have to pay your new lender’s registration costs when you switch a collateral charge. This could set you back upwards of $1,000, including the appraisal. By contrast, when you switch lenders with a standard charge mortgage most lenders pick up that cost. But at least you’re now able to get ultra-competitive insurable rates.

P.S. Those closing costs can sometimes be added to the new mortgage so you’re not out of pocket.

Keep in Mind

To qualify for the best insurable rates when transferring a mortgage to a new lender, you must:

  1. Prove you can afford a payment based on the Bank of Canada’s posted 5-year fixed rate, now 5.34%.
    • See the one exception below
  2. Have an amortization of 25 years or less (or reduce your amortization to 25 years).

Grandfathered Mortgages

In its statement, CMHC also confirmed that, “the mortgage rate stress test requirement does not apply to loans insured prior to October 17, 2016 provided that the loan continues to be administered by an Approved Lender.”

That means if you’re switching lenders and have an insured mortgage that was originated prior to October 17, 2016, and not refinanced since, you can be stress tested at your lender’s discounted five-year fixed rate instead of at the government’s minimum qualifying rate (i.e., 5.34% or more). That makes it even easier to switch lenders if your debt ratios are above average.

Side note: Many lenders do not allow this. But some do, and brokers know who does.

The Million-Dollar Limit

New mortgages on properties over $1 million cannot be insured. That means you cannot get the best insured rates on them.

That said, if you have an existing insured mortgage originated prior to October 17, 2016, and you are merely switching lenders, it’s not a deal stopper if today’s value is over $1 million. You can still get insurable rates.

In addition, default insured properties that were under $1 million at the time of origination—but increased in value to over $1 million at the time of transfer—can also get favourable insured rates.

Tack On Up to $3000

When switching to a new lender, some lenders let you add up to $3,000 to your mortgage without it being considered a refinance. And you can still get great insurable rates.

 

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All of this applies specifically to federally regulated mortgages, of course. (There are other loopholes if you’re transferring into an uninsured credit union mortgage, which we’ve discussed before. See: Mortgage Rules 2018: Credit Unions & The Stress Test)

The takeaway: This government policy update is truly welcome news for mortgage consumers. It shows regulators care and are listening to common sense. It’s about time we get some money-saving risk-neutral breaks on the regulatory front.


7 Comments

  • That’s good news for people with mortgages that are already insured. It doesn’t seem like such a big deal for going from uninsured to insured on a switch. At 80% LTV, a 2.4% CMHC insurance premium means you need a discount of 17bps over the full 25 year amortization. To make up for the insurance premium in just a 5yr term, the discount vs uninsured has to be 50bps.

    • The Spy says:

      Hi Ralph, You don’t need to pay the insurance premium when switching into an insurable mortgage, even if your mortgage is presently uninsured. The lender pays it for you, typically by “bulk insuring” the deal with a pool of other mortgages.

  • Khalid Singh says:

    Finally a government decision that actually saves borrowers money instead of costing them more!!!

  • That’s very interesting. So someone with a low-ratio uninsured mortgage can switch into an insured (still low-ratio) mortgage? Do most lenders offer that?
    Do you plan to change the rate search function as a result? I believe you only show insured rates for high ratio mortgages.

    • The Spy says:

      Yes, a low-ratio uninsured mortgage can be insured when the borrower is transferring lenders (assuming it meets all insurable criteria).

      No search function changes are necessary. Insurable rates already appear when the loan-to-value is 80% or less.

  • BC Ratespy Reader says:

    Please help me to understand my situation in BC. My current mortgage was CMHC insured at 80% ratio 2 years ago. The property value itself has gone up close to 50% as per latest appraisal.

    Property value was $665k, now $995k. I’m planning to exit out this 5 year fixed rate contract and switch to another bank to 5 year variable. The new mortgage itself turns into 60% loan-to-value ratio.

    Is this new mortgage still going to be “CMHC insured” after the transfer? Is there additional charge payable to the CMHC? Thank you!

    • The Spy says:

      Hi BC R.R.

      Was your mortgage transactionally insured or bulk insured? That’s the first question.

      If it were already transactionally insured then no additional premium would be required. You could then you could switch to a new lender and qualify for high-ratio insured pricing, which are the lowest rates of all.

      If it was bulk insured (with the premium paid by the lender), then the mortgage will not be insured when you switch lenders — unless you or the lender pay another premium. You still may be able to get insurable rates in this case, which are close to, or sometimes the same as, high-ratio insured rates.

      The best bet is to contact a broker and have them check your CMHC insurance status. Then compare the rates they quote you with what you find on the Spy and elsewhere in your search.

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