January 16, 2018

What to Expect When Renewing Your Mortgage in 2018

The Greek Stoic philosopher Epictetus once stated, “Wealth consists not in having great possessions, but in having few wants.” One may be tempted to dismiss Epictetus’ advice since, born a slave, he had to make due, presumably, with very little. However, for those about to renew a mortgage it seems that heeding the ancients, including Seneca, who proclaimed that frugality makes a poor man rich, may be sound advice.

Although qualifying for a mortgage is often a stressful experience fraught with worry and doubts about the future, renewing your mortgage can be less biting on your soul – and your pocketbook – if you inform yourself, build on your strengths in meeting your mortgage payments, and pay some mind to the wisdom of the ancients. To this end being financially literate about your mortgage will pay you dividends.

Look Beyond Lowest Rate

Confusion and doubt can reign when your mortgage comes up for renewal. Many homeowners are singularly focused on getting the lowest lending rates. Sound lending and borrowing practices, however, do not necessarily lead to higher interest rates. Consider hidden costs that may accompany lower rates such as penalties for early payout, or legal fees involved in transferring your mortgage to a new home or property. Another complicating factor includes those who hold a collateral-charge mortgage which is a loan held against your property.

Refinancing a mortgage in these situations can involve additional legal and banking fees. Those renewing their mortgage for the first time also need to be aware of the impact that the new B-20 mortgage underwriting guidelines may have.

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Why Are There New Mortgage Rules?

In the wake of the financial and subprime mortgage crisis, primarily in the US from 2007-2009, (also known as the Great Recession), many folks found themselves unable to manage their mortgage debt. Canada’s situation was different owing to better banking regulations at the time, however, the risk needed to be managed.

The Financial Stability Board, the financial oversight organization of all G20 nations, instituted new guidelines as a direct result of the financial crisis caused by poor American mortgage lending practices. Announced last October via the Office of the Superintendent of Financial Institutions – Canada’s federal financial regulator – they took effect on January 1, 2018, these new guidelines are designed to apply new stress testing on uninsured mortgage loans.

They require all federally-regulated lenders to vet your mortgage application through the use of a minimum qualifying rate that corresponds to the Bank of Canada’s current five-year benchmark rate. Lenders do not have to apply the new stress test on those renewing their mortgage. However, those who have the stress test applied and fail, will be stuck renewing their mortgage with their current financial institution and cannot shop around for better rates.

Passing the Stress Test

The new rules apply to those applying for mortgages in the new year. A report published by the national industry group, Mortgage Professionals Canada, claims that approximately 18 per cent, or about 100,000 homebuyers, would likely fail the stress test for new mortgage applications in 2018. About a third of millennials are home owners currently. Of those looking to get into the market, roughly eight out of ten will do so within the next five years. However, according to Robert McLister, writing for Canadian Mortgage Trends, roughly 70 per cent of this cohort of millennials will not have enough for a down payment.

Seventy per cent is fairly significant and the new stress testing rules, although likely to shut some out, are designed to decrease population risk over the long haul. If you’re going be house-hunting next year, this may force you to settle for a less expensive home than you would be able to buy today or, you might have to wait and save up for a larger down payment. All told, these new mortgage rules are an aspect of the circumspection in spending that the ancients have counselled throughout the ages. Tightening up the financial entry points into home-buying will result in a more stable financial future for many.