What if I told you your mortgage renewal might offer a shockingly high-interest rate? Or that now, some mortgage lenders require a property appraisal at renewal time, and some even check your credit or confirm your income and employment prior to renewing your mortgage?
Bad News for Mortgage Renewals in Canada
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 renewal maturing five months from now will NOT BE RENEWED.
At the 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%!!
Or the personal trainer whose credit union mortgage renewal offer was at 6.50% interest!
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 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 that 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 tickety-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 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 explain.
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:
- How are the credit card balances relative to their limits?
- Oh, looks like one of them has had a period of unemployment or disability.
- I say old chap, what about those late payments you’ve had recently?
- Oh dear, is that a collection dispute we see?
- Hey, this credit score is much lower than when they bought the house!
- Hmmm… a consumer proposal!
- Bingo! A personal bankruptcy!
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:
- If the real estate market continues its decline, and an appraisal at renewal becomes required, what will the fallout be when an appraisal falls short of the lender’s expectations?
- What if mortgage lenders run a credit bureau inquiry on their renewing clients, and don’t like what they see?
- We recently heard from other brokers about some clients being asked to verify their income and employment at renewal. Life happens – what if changes are not deemed acceptable to the lender?
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 of “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 personally I don’t see how anyone 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.
This is what I have personally witnessed in our client base:
- Mortgage in Richmond Hill for $588,000 coming up for renewal. The lender ordered an appraisal (which clients paid for) and the clients were told their new mortgage would be for only $546,000. The property appraised for $790,000.
Meaning they had to come up with $42,000 just to stay with this lender. Not many people have that kind of money lying around!
- $290,000 mortgage in Manotick (a suburb of Ottawa). These clients were told their lender would not renew and they should take their business elsewhere. The property appraised for $415,000.
- $275,000 mortgage in Hamilton were told their renewing mortgage rate would be 7.99% (more than double the current rate). The property is worth over $600,000.
- $242,000 mortgage in Ajax were told their renewing mortgage rate would be 6.5% for one year. The property is worth close to $600,000.
Here is what we know is happening out there:
- Some lenders now require an appraisal prior to renewing the mortgage
- Some lenders are pulling the borrowers’ current credit history prior to renewing the mortgage
- At least one lender is asking their renewing mortgage clients to verify their employment and income
The mortgage renewal process is starting to resemble the initial mortgage application process at the time of purchase. Lenders are assessing your credit history, your income and employment, the quality and value of your property. And they will price your mortgage renewal accordingly.
Key Mortgage Renewal Tips
The best (first) step you can make to prepare for your renewal
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.
Secondly, get an appraisal.
By ordering an appraisal around the time of mortgage renewal, your lender will know just how much equity you have in your home, and how ‘safe’ their investment is.
This is the sort of thing we can expect more of in a weakening real estate market. Not that prices have fallen off a cliff or anything, but as a generality, prices overall are down from a year ago.
Bucking the trend — markets like Ottawa, Montreal and Belleville are pretty hot right now. And if you are shopping for a condo or townhouse in the GTA, you won’t find many bargains out there either.
Mortgage lenders want to understand the quality of their loan portfolios. Higher risk mortgages (for example, those with little equity or where the borrowers’ credit history is poor) are possibly going to be offered much higher mortgage renewal rates. Or… told to take their business elsewhere.
Thirdly, talk to a mortgage broker.
Talk to a mortgage broker anytime in the year leading up to your renewal date. You really do owe it to yourself to proactively manage your mortgage renewal.
Have a complete check up on all critical components and get in front of any issues. And if all looks good, you might consider even switching lenders prior to your maturity date if you think rates will continue to rise between now and then. At the very least, lock in current rates for the next four months, and you can re-evaluate a bit later on.
As a result of these major changes, we’ve recently launched a Complimentary Mortgage Renewal Assessment for all homeowners across Canada. We’re here to assist you through the changes in IFRS9 and help you be approved for a mortgage renewal. We will also provide advice on what proactive steps you should take prior to renewal time.
Get in touch today!