Last month we received an email from a distraught client in Ottawa who had just received a letter from his mortgage lender letting him know his mortgage maturing five months from now will NOT BE RENEWED.
Same time a Hamilton family called us to complain their mortgage lender had just sent them a renewal notice — they are welcome to stay but the new rate will be 7.99%!!
And only yesterday, another family from Richmond Hill sent me their mortgage renewal letter. The letter states the clients must first pay for an appraisal on their home, and the value of their home must be such that the new mortgage will be less than 65% of the appraised value.
Unfortunately, I believe we are going to hear many more such stories in the months ahead.
And it’s not just because of the impact of the new stress test on mortgage lending. Rob Carrick recently published an article where he discussed the impact of the stress test on renewing mortgages and refinances. Some people cannot refinance their way out of debt the way they used to. They don’t qualify anymore.
And that is the angle the media are presently taking. Personally, I think this is just the tip of the iceberg.
Mortgage renewals are going to be water cooler fodder for a long time, and it’s only just starting.
And the reason is a new International Financial Accounting Standard called IFSR 9.
It used to be as long as your mortgage repayment history was impeccable, you did not worry too much about your mortgage renewal.
In fact, we have helped many clients navigate renewals through consumer proposals, personal bankruptcies, and other life altering events, and their renewal was ticket-y-boo.
I recently raised this topic in a private Canada wide mortgage broker Facebook group — over 4,000 members strong. They definitely have their finger on the pulse of the mortgage industry in Canada.
Joanne Vickery, mortgage portfolio manager with Fisgard Capital Management wrote:
“I have just been learning about the impact of IFRS9 (International Financial Reporting Standards) that will be coming into play at the end of 2018.
The new rules state a lender will need to set aside additional reserves on a file should there be a substantial change in the profile. The only way for a lender to determine this would be updating the information on the client periodically, and renewal time would be most appropriate. (E.G. if a client’s credit rating has declined, the lender will be required to set aside more reserves for that file whether there is a loss or not)”
“Credit is just one of the tests, job loss and value decline can also impact reserve requirements“
I started digging around about this IFRS 9 after reading Joanne’s comments and she is right — this IS a big deal. It’s about far more than just mortgages; but I will leave that to others to elucidate.
Vickery went on to say:
“Hence why you are now seeing some lenders starting to verify files at renewal. They are implementing the new rules ahead of the deadline. I suspect you will see more lenders implementing this as the deadline approaches.”
What does that mean exactly — “verify at renewal” — well… appraisals and credit checks for starters. It’s fair to expect income and employment verification is in the cards too.
Let’s peek at the credit report:
Brantford and Toronto based mortgage professional Terrilyn Moore AMP says:
“This is absolutely happening, and we were told this at the Mortgage Professionals Canada conference that the lenders would be doing this and offering higher renewal rates based on credit and their inability to qualify to go elsewhere.”
This leaves us ruminating about a few things:
One can speculate that renewing a mortgage might become very similar to the process you go through when you apply the very first time. Except now we also have the stress test.
Used to be a mortgage renewal letter would list several term and rate options; usually pretty competitive, and invite the homeowner to select their preference.
Now you may find there are verification steps you never went through before. Or you may be told words to the effect “Give us a call, we will see what we can do.”
Words, that are sure to leave you with more than a few burning questions…
Will this affect all mortgages, all lenders?
Sorry but I don’t yet know the answer to this question. Some brokers feel “A lender” clients will be immune to this, but I don’t see how any one can be exempt from this new financial accounting standard called IFRS 9.
And, what about borrowers who have an insured mortgage?
CMHC, Genworth and Canada Guaranty provide default insurance (typically to hi-ratio borrowers) and are in place to protect the mortgage lender from borrowers whose mortgages go sideways. Therefore, you would think lenders should not fret much over these mortgages.
But the truth is… we just don’t know yet.
What I do know, taking proactive steps to be prepared prior to renewal time is always a GOOD IDEA.
For starters you want to know what is in your personal credit report. Get yourself a copy — pay for it if you have to, because you want the score too. If you are not sure how to read and interpret your report, find a professional who will do this for you.
And if it is less than stellar, figure out now what you can do to improve the picture BEFORE your mortgage comes up for renewal.
In fact, you had better have everything rosy at least six months before your renewal date, because that’s when many lenders work on renewing their mortgage portfolio.
Related Article: Mortgage renewals in 2018 – prepare for nasty rate surprises, by Rob Carrick the Globe and Mail
Related Article: IFRS 9 presents a new world for Canadian financial institutions beginning January 1st 2018, by Darrell Ivan, National Lead for Risk at SAS Canada
Related Article: IFRS 9 Financial Instruments, by PWC Canada