Mortgages have come into the spotlight in Canadian financial news over the last few years. This is due in part by the global financial downturn of 2008 and in part by the trends in Canadian’s borrowing habits. Over the last two years the Federal government has made changes to the rules affecting mortgages four times. Each change has made your mortgage options more restrictive. I will take the time here to highlight a borrower scenario and explain the mortgage rates available and how the changes to mortgage rules have affected them.
Toronto Mortgage Rate Sensitive Refinance
Our couple “Thom and Linh” jumped into the housing market at the peak of Toronto’s froth in 2007 with a 5% downpayment on their $525,000 bungalow. They qualified for a super low variable rate mortgage which helped them carry the large debt they just incurred. A 35 year mortgage helped offset their borrowing costs as well as stretching out the repayment and lowering their monthly payment making this an affordable proposition.
Fast forward to today and the story has changed. As Thom and Linh are used to super low rates and great borrowing terms, it came as quite the shock to learn of their options today. First the good news for our couple – their property has appreciated and would fetch approximately $650,000 in today’s market if they were to sell. This has provided them with market appreciation and a 20% equity position. The shock came when we discussed their options on the renewal date in a potential refinance. As rate sensitive clients, Thom and Linh were looking to acquire a similar mortgage product as they had enjoyed previously. The fact is, this mortgage is out of reach for a surprising amount of Canadians.
Subject to Reduced Amortization
First of all, I explained to Thom and Linh that the 35 year amortization is no longer available for the mortgage product they desired and even though they had paid down their 35 year to 30, today they would be subject to a 25 year amortization. This is due in part by the mortgage changes and part by the risk lender’s see in taking on an extended amortization without mortgage insurance to offset it. The affect this has on our couple’s monthly payment is the same as if the interest rate on their new mortgage was increased by a full 1% on the whole mortgage. Needless to say, our rate sensitive couple did not like the sound of that.
Qualifying Tougher for Same Mortgage Amount
Next was the way in which the income Thom and Linh earn is qualified in determining if they would be able to make their mortgage payment as a percentage of their gross income. Back when they applied for their super low rate variable mortgage in 2007, they were allowed to use up to 44% of their income before taxes to qualify toward the maximum mortgage they could borrow. Now they are only able to use 35%. For Thom and Linh, this was a concern as their family income would have had to have increased by 12.5% over the term of their mortgage to not have this change affect them and most Canadians have not received one pay raise in the last five years let alone a 2.5% increase yearly.
What was much more disconcerting was how the bank now makes you qualify for their super low rate variable mortgages. Prior to the mortgage rule changes, Thom and Linh just had to use the interest rate they were applying for to qualify to service the debt. Today, they have to qualify at the Bank of Canada’s qualifying rate of 5.24% to access an interest rate of 2.85%. That is almost double the interest rate just to qualify for a low interest rate product. Needless to say, Thom and Linh were feeling a little out of sorts in trying to make sense of all the information.
Mortgage Solution for Rate Sensitive Borrowers in Toronto
Finally we got down to what was available to Thom and Linh today. As their Toronto Mortgage Broker, I explained that there were still options to access historical low rates. I showed them a super low fixed rate mortgage product with an interest rate of 2.94% that they did qualify for. This was only slightly higher than what we were looking to acquire and has the added benefits of protecting them from interest rate increases. The best part of this mortgage solution was they only had to qualify at the interest rate they were at. A low fixed interest rate with no surprises for the next five years was quite the consolation to Thom and Linh and after explaining the changes and answering their questions, our couple left my office feeling better prepared for the future.
For the foreseeable future, mortgages in Canada will be changing to meet the demand for prudence. And although some of the changes will make things difficult for some, having your Mortgage Broker available to assist you in understanding how the changes affect you will be invaluable. Take the time to invest in yourself and develop a working relationship with someone who is in the markets everyday and is committed to helping you.