Currently, I am fielding a high number of calls from people looking for information about mortgage renewal options.
In 2016, when the mortgage “stress test” was introduced, I remember questioning the wisdom of the new qualification guidelines. I also remember qualifying clients based on a rate of 4.64 % when their mortgage rate was only 2.24% (that was the Bank of Canada benchmark rate at the time) and feeling a bit frustrated that their borrowing power had been reduced.
Clients had to look for ways to strengthen their applications. Over the last few years, with prices and rates increasing, this has meant clients have been leaning on family for help with their downpayment or adding them to their applications as co-signors.
By 2018, the Bank of Canda benchmark rate we were using to qualify clients had risen to 5.25%.
Fast forward to 2023 and those mortgages are now coming up for renewal and clients are looking at renewal rates around 6%. In theory, the “stress test” was bang on and clients were qualified to actually make the payments based on the renewal rates they are facing today (plus or minus a 0.5%). In theory, clients should be able to carry their new higher payments based on today’s interest rates and, in theory, clients’ income have risen over the last five years. But reality looks a bit different.
The cost of living has skyrocketed. I’m sure we all feel it every time we see our bill at the grocery store or the fuel pump. I don’t have official statistics but I am seeing many clients carrying more consumer debt when I review their updated applications. It is not unusual to see people trying to manage a credit line, multiple credit cards, and even one or two vehicle payments.
What this increased consumer debt means for a few clients that I’ve worked with is they either need to stay with their current lender and accept the renewal rate offered, or they need to consolidate their consumer debt into their mortgage in order to afford to stay in their homes.
The significant increase in house prices over the last five years means refinancing at renewal is an option. Sometimes, arguably many times, this is the right decision in order for clients to reset their finances. Sometimes harder decisions need to be made. Is that the right decision long term?
One of the other options is selling their homes to get out from under the consumer debt but the challenge with that decision is that suitable rentals are hard to come by and in many cases, the monthly rent payment is higher than what a mortgage payment would be.
The sticker shock of renewal rates and payments has been sobering this fall. If you have a mortgage coming up for renewal over the next few months, I encourage you to connect with your lender or mortgage person at least four months ahead of time to look at what your options are.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.