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.