In my first column of 2018, I talked about potential impacts of the mortgage changes that were rolled out Jan. 1.
Apart from the significant drop in buying power due to the stress test, one issue I was most concerned about was options for clients at renewal time.
In a nutshell, many clients who purchased their homes prior to the first round of legislation changes (implemented in October 2016) are in the unfortunate position of not qualifying for the size of mortgage they are carrying.
Why is this an issue?
In the past, when your mortgage came up for renewal, you have likely received a renewal notice that offers competitive rates. As long as your mortgage was paid as agreed, odds were solid that renewing your mortgage was a simple matter of signing the renewal offer.
What we have seen over the last year is a marked difference in how many lenders treat renewals.
In March, a client called to ask if 4.89 per cent was a normal rate.
At the time, new mortgages were being offered around 2.99 per cent.
I made a call on her behalf to see if there was an error on the renewal agreement.
The lender basically said that the client was being offered this rate as a result of the lender’s review of her credit report. She had run into financial issues due to a job loss and had slow payments on her credit cards and cell bill.
I asked if they could offer her a better rate. I was politely informed that the lender would not match any other rates; the client could take the rate or find financing somewhere else.
In this case, the client no longer qualified so was forced to stay with her existing lender at the new higher rate.
This week representatives from Mortgage Professionals Canada presented to the finance committee. They recommended nine changes to help address some of the fall out from the legislative changes implemented in October 2016 and January 2018.
The first recommendation was to allow an exemption for people that bought their homes prior to October 2016, so that they are able to switch to other lenders at renewal based on contract rate instead of the stress-test rate (currently 5.34 per cent).
This is qualified by saying that they must have met the obligations of their original mortgage as agreed.
This recommendation also includes people who want to port the mortgage from their current home to another, provided no additional funds are required.
The second recommendation requests that the government adjust the change to refinances that was implemented in November 2016.
At that time, refinances were excluded from being covered by default insurance (ie: by CMHC).
At the current time refinances present more risk to lenders so they are charging higher interest rates. This change would allow lenders to offer slightly better rates as compared to what is happening in the mortgage market right now.
One segment of the market that was particularly affected by this change was clients who own mobile homes.
The majority of lenders will not finance mobile homes unless they are insured. Under the current rules, if you own a mobile home (even free and clear) you are now unable to refinance to pull any equity out of it as refinances are considered uninsurable.
Perhaps the recommendation that really jumped out at me (although I was glad to see all of them) was the suggestion that the government consider policies to address the risks associated with household debt like lines of credit, credit cards, and vehicle loans.
I have worked with clients who have gotten in over their heads and are now struggling to meet their monthly payments. They’ve applied for and gotten more cards with higher limits or walked into a furniture store and been approved for a loan right away.
Sometimes this is due to mismanagement of their finances, but many times there are extenuating circumstances. Life happens.
What has been painful to see is that clients who have tons of equity in their home that could consolidate their debts and put themselves back on track don’t qualify to carry the higher mortgage.
This is ironic in that the slightly larger mortgage payment would be quite manageable as compared to all of the payments they are making on high-interest credit cards and loans.
As a broker, I don’t like to see clients get in over their heads. It’s a pretty painful conversation when the only option left is for clients to sell their home. In our market, rents are often higher than the client’s mortgage payment.
Another of the recommendations suggests that the stress test be amended to a percentage over the contract rate as opposed to using the Bank of Canada Benchmark rate.
Particularly in the Okanagan, I agree with having a stress test. It’s all well and good to say that people qualify for their maximum mortgage payment, but reality is that often people live paycheque to paycheque, and may end up in trouble if interest rates increase substantially.
However, the current stress test has decreased buying power for most home buyers by about 20 per cent. I feel there should be a happy medium, which is what this recommendation is hoping to achieve.
The intent of the legislative changes was to cool Canada’s housing market and improve affordability for Canadians. I think the changes rolled out in the fall of 2016 and January 2018 was a knee-jerk reaction implemented without adequate consultation and thought.
We’ve now had two years to adjust to the changes. Impacts have been far reaching. These changes have protected some Canadians, and created barriers to home ownership for many others.
Will anything come of the presentation by Mortgage Professionals Canada to the Finance Committee? I certainly hope so. It will be interesting to see what happens over the next few months.