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New Mortgage Rules

On January 1, 2018, Canada’s already strict mortgage lending rules got even tougher, making it more difficult for those looking to renew or refinance their mortgages. Unlike before, Canadians of every stripe now have to prove that they can handle an interest rate hike that is substantially higher than their current rate.

On top of that, new mortgage rules mean borrowers, even those with a down payment of 20% or more now need to pass a stress test. Before 2018, only those borrowers with a small down payment who needed mortgage insurance had to face a stress test.

This represents the seventh time that the federal government has tightened the country’s mortgage rules since July 2008, severely limiting the amount of debt that Canadians refinance, renew, and borrow.

The new lending rules implemented in 2018 though could have the biggest impact on Canadian homeowners looking to refinance or renew. There is one silver lining for those homeowners who are looking at renewing or refinancing their mortgages: The new, stricter lending rules only apply to federally regulated financial institutions—the rules do not apply to private lenders.

Image Source: iStock.com/tumsasedgars

How Will the New Rules Affect Mortgage Renewals?

Without question, the new mortgage rules will make it more difficult for homeowners to renew or refinance their mortgages.

• Stress Test

The new stress test ensures first time homebuyers can qualify for a mortgage at the Bank of Canada’s current five-year benchmark rate plus two percentage points.

But homeowners looking to renew already have a mortgage so why would the stress test matter? Unfortunately, your lender will still want to make sure you can pay your mortgage.

Just because you were approved for a mortgage in the beginning doesn’t mean your renewal will be approved. In fact, critics of the new mortgage rules say the stress test will hurt those looking to renew and refinance the hardest. Keep in mind, you need to qualify at the higher stress test rates—not your existing contractual mortgage rate.

• Loan-to-Value Ratio

The loan-to-value ratio (LTV) measures the value of a mortgage as a percentage of the total value of the property. For those thinking of refinancing, Canada’s big banks need to make sure the LTV ratio is adjusted to local market conditions. The higher the LTV ratio, the riskier the loan.

If you want to get a line of credit or home equity loan, the LTV ratio has to be lower than 80%. Or put another way, you can only refinance a mortgage if you’ve got 20% equity built up in the value of your property. If you haven’t built up enough equity in your home, you won’t be able to refinance until you do.

Even if you have built up enough equity, the new stricter lending rules will make it harder to qualify for a home equity loan or home equity line of credit. The banks will add two points to the current benchmark rate when you apply.

Can You Be Denied a Mortgage Renewal?

When your current mortgage term reaches its maturity date, you will need to renew the outstanding balance for another term. Before your term expires you’ll receive a renewal offer from your current lender. It will most likely include the new mortgage rate and length of the term. All you need to do is accept their terms and send it back. Except signing the renewal doesn’t mean you’ll get approved.

Even if you’ve made your mortgage payments on time, the lender will want to review your current financial situation, this includes your credit score. They want to see how much debt you’ve accumulated and to see if your employment situation has changed. If your current lender doesn’t like what it sees, it could choose not to renew your mortgage.
Remember, you have to qualify according to the higher stress-test rates—not your existing contractual mortgage rate.

If you fail the stress test, chances are you’ll be stuck renewing your mortgage with your current lender at less than desirable rates.

You can look around and try to find a better rate, but you may get denied by a new lender. That’s because you need to submit a new mortgage application with your renewal.

The new lender doesn’t know anything about your financial situation and will need to verify your income to make sure you meet their credit requirements before they will approve your application.

Tips for Better Mortgage Refinancing

• Homeowners thinking about refinancing are being hit on two different fronts: interest rates are rising, and lending terms are tougher. This means it’s more important now than ever to make sure you get the best terms and rates when it comes time to renew.
• If your mortgage is coming up for renewal, it’s a good idea to start shopping around now and negotiate with prospective lenders. But where can you turn if your financial situation has changed; if your debt level has increased significantly; if your credit score has fallen; or if you make less money?
• If any or all of these scenarios have happened to you, it won’t matter how much you shop around. Traditional lenders will see you as a risk.

Canadalend.com, Mortgage Renewal and Refinancing Experts

Thanks to stricter mortgage rules, it is now a lot more difficult for Canadian homeowners to renew or refinance their mortgages. But those rules only apply to federally-regulated financial institutions. Since Canadalend.com is independent, they can help you find a private lender to renew or refinance your mortgage with the best terms and rates.

Where the country’s big financial institutions have to legally follow the new Office of the Superintendent of Financial Institutions (OSFI)-mandated stress test for mortgage renewals and refinancing, private lenders don’t have to. And the mortgage renewal and refinancing professionals at Canadalend.com have access to hundreds of different private lenders.

So, if you’re looking to renew or refinance a mortgage, contact Canadalend.com today. We’ll evaluate your current financial situation and help you find a lender that can provide you with a financial product that suits your needs. Or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.

In your search for a mortgage, you should meet with several lenders to interview them and discuss the terms and process. During this time, you need to properly gauge the terms they are offering and the advice they are giving to guide you through the process. Not all lenders are created equal and the key is to come ready with the right questions to ask.

Here are three questions every applicant should ask a lender during their first conversation.

How to Decide Between Fixed or Variable Interest Rates?

One of the biggest decisions you will make, outside of choosing a home and making an offer, is what type of interest rate to choose. Your lender must have the market knowledge and a sense of how the banks will act to guide you to the best decision for your situation. There’s no one size fits all.

A fixed interest rate means the rate will stay the same throughout the duration of your mortgage. This is a good option if the rate is low and there are signs that it will spike at some point. A variable rate is volatile and can increase or decrease based on what The Bank of Canada does. Typically, you are signing up for a higher rate with the hope that it will drop at some point, meaning you can put more towards the principle.

Can I Pass the Mortgage Stress Test? 

The stress test has been a popular point of discussion since late 2017.  Every lender you meet with should outline the parameters of the stress test. They should also honestly evaluate whether your application could pass with flying colours. A lender should acknowledge when an applicant could have trouble passing the stress test and then offering advice on how to better their application.                                                                        

What’s the Pre-Approval Process?

Finally, inquire about the steps it takes to be pre-approved for a mortgage. Your first conversation with a lender should give you the tools to prepare the best application, as these things are rarely straightforward. Get a list of everything you will need so that you can create a comprehensive checklist. Be sure to ask if there are any tips that can help you get approved.

Contact us today to put these tips into practice and to get more information about mortgage approvals.

Purchasing a home is an expensive undertaking. By the time you’ve forked over the down payment, legal fees, and moving costs, you will be financially and emotionally drained. Before deciding to buy a home, you must think beyond the purchase price because those costs, while substantial, are a one-time thing.

Maintaining a home is costly and every homeowner needs to understand what they’re getting into before their mortgage is approved.

Property Costs

In the GTA, each homeowner must pay property taxes every year. The cost is devised by multiplying a property’s assessed value by the tax rate. There is flexibility with respect to the payment schedule, meaning homeowners can pay monthly, annually or make six equal payments a year.

Exterior Costs

If you own a house, you will have monthly costs to care for the exterior of your property.  Some of these are discretionary whereas others are required for the health of the house. These costs include:

• Cleaning the gutters
• Lawn care and gardening
• Roof Care
• Snow removal for driveway
• Window washing

Remember, some of these tasks can be performed by the homeowner, assuming they know what they’re doing and have the time. Doing a lackluster job could cost you more money in the future as you’ll have to pay someone to undo your work and then complete the job.

The Guts of the Home

There’s a lot of essential equipment and technologies that need regular upkeep in your house. Furnaces and hot water heaters need regular inspection and maintenance. You will also have to pay for general repairs and some opt to pay for housekeeping.

A good rule is that the annual maintenance of a home will cost one percent of the purchase price. If your home costs $500,000, then you should budget $5000 for ongoing maintenance. Anything left over can just roll into the budget for the following year. Some prefer to calculate maintenance costs per square foot. The rule here is to budget $1 per square foot. A 1,000 square foot home would conceivably cost $1,000 in maintenance.

For maintenance, repairs, and upgrades cash flow is essential. A home equity loan is a proven way to leverage your equity into maintaining or increasing the value of your property. If cash flow isn’t an issue, then be sure to properly budget.

A home equity line of credit (HELOC) is a way for homeowners to gain access to funds by securing their mortgage against the loan or line of credit. By leveraging the equity in your home instead of your credit rating and assets, you can receive more money and a better interest rate.

Here are some tips on getting a good deal on your HELOC.

Shop Around

Often, lenders offer different terms based on an application. This can include different penalties or fluctuating introductory rates. It’s smart to speak with a variety of lenders and institution to get a sense of the different deals and then decide what is best for your financial situation. When you home is being used as collateral, it’s worthwhile to exercise more due diligence.

Once you’ve chosen a lender, be sure to ask about how the rate can change, especially if you are taking advantage of an introductory rate. In addition, inquire as to whether your rate will fluctuate with prime or if it is fixed.

Do you Have Enough Equity? 

Your equity in your home determines the loan or line of credit amount you can receive. It can also influence the interest rate.  The simple formula is comprised of approximately 75% of a home’s value (determined by an appraiser) minus the amount owed. Some lenders will go as high as 80%. Ultimately, this formula ensures that you don’t borrow more than the value of your home.

The less you owe towards a mortgage, the more you can borrow against the value of your home. You might want to wait until you have enough equity.

Spend the Money Wisely 

You want to use a HELOC for very specific reasons like education, medical or home renovations. For those with market savvy or business aspirations, using the money to invest or to start a business is common.

Whatever the money is used for, pay it back immediately. Like any loan or line of credit, this will limit the amount of interest you pay, and can help when applying for this product in the future.

A HELOC is a great way to fund certain aspects of your life or to increase cash flow. Putting more effort into your application and understanding the process will go a long way to making sure you enjoy the benefits of this financial product.