Around half of Canada’s mortgages are up for renewal this year. If yours is one of them, you’d be justified for feeling blue.
As of Jan. 1, everyone getting or refinancing a mortgage has to undergo a federal mortgage stress test. That, generally, means they have to qualify for a loan with an interest rate that is higher than the rate the bank is willing to give them. If you’re renewing your existing mortgage, you can avoid the stress test — but only if you stick with your current lender, which denies the possibility to shop around for a better rate.
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On top of that, interest rates continue to climb, which moves the stress-test threshold higher and higher.
But things aren’t as bleak as they may look, mortgage professionals say.
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If you have a five-year fixed rate mortgage, as the vast majority of Canadian homeowners do, renewing now doesn’t mean having to switch to a higher mortgage rate. In fact, you might even be able to get a lower rate, according to financial products comparisons site Ratehub.ca.
The best five-year fixed rate in September of 2013 was 3.29 per cent. Today, you might be able to get a five-year fixed for as low as 3.14 per cent, according to Ratehub data.
A borrower who started out in 2013 with a $400,000 amortized over 25 years would see her monthly mortgage payments drop from $1,953 over the last 5 years to $1,759, a decrease of $194.
That’s why you should give yourself plenty of time to shop around for the best rate, according to James Laird, co-founder of Ratehub Inc. and president of CanWise Financial mortgage brokerage.
“Giving yourself a head start on comparing rates also gives you time to consider switching providers,” he said in a statement.
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Changing lenders to get a lower rate isn’t in the cards for borrowers who don’t pass the stress test. But Laird said the majority of mortgage-renewal applicants won’t have to worry about that.
“At renewal a borrowers mortgage balance is lower, and it’s likely that the borrowers household income has increased as well. The majority of consumers can expect to pass the stress test at renewal,” Laird told Global News via email.
And even for those who don’t pass the stress test, there may be at least one workaround.
“If you don’t pass the stress test simply because you have a lot of higher-interest non-mortgage debt … and you have sufficient equity in your home, refinancing may be your best play,’ said Rob McLister, founder of rate-comparisons site RateSpy.com and mortgage planner at intelliMortgage.com.
That’s because consolidating your debts into a lower-interest loan might help you “come in under the mortgage industry’s maximum debt-ratio limits,” McLister said.
An application to refinance a mortgage is also subject to the stress test, but some borrowers might be in a better position to pass the test if they refinance than if they simply renew their mortgage, according to McLister.
Refinancing can significantly lower your so-called total debt service ratio (TDS), which measures how much of your income goes toward covering all your monthly debt payments. For example, if you have significant credit card debt at 20 per cent interest and are able to fold that debt into your mortgage at a much lower rate, your monthly payments will shrink significantly, bring down your TDS.
Lenders also look at something called gross debt-service ratio (GDS), the percentage of your pre-tax income needed to pay your housing costs. In addition to the stress-tested (i.e. higher) monthly mortgage payment, your bank will look at the monthly cost of your property taxes or half of your condo fees and your heating costs.
Refinancing your mortgage will increase your mortgage payments, which will push up your GDS. But your GDS will go up much less than your TDS came down, which will likely allow you to pass the stress-test bar, McLister said.
Still, “any spare cash this creates should ideally be applied to your debt principal so you can dig out of your debt hole quicker,” he added.
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Variable rates are also looking better these days than they did in 2013. The average well-qualified borrower can count on variable rates around 2.68 per cent today, compared to 2.75 per cent in September of 2018, according to data from RateSpy.
Also, the spread between fixed and variable rates has been widening, making a floating rate a more attractive option.
“Consumers should consider a variable rate mortgage even in a rising rate environment,” Laird said. “This is particularly true for [those] who have a smaller mortgage balance and/or … who plan on paying down their mortgage rapidly.”
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If you want to renew with a fixed rate, the bad news is that rates are likely headed nowhere but up.
“Fixed rates move with government bond yields. Right now, those yields are near a seven-year high. There’s a very good chance yields, and hence five-year fixed rates, could break out to the upside,” McLister said.
The good news, though, is that borrowers who need a mortgage within 120 days can lock in a guaranteed rate, he added.
If you’re mortgage is up in the next four months, you should lock-in “tout suite,” according to McLister.
If you’re worried about rising rates, another option is to renew your mortgage before the end of your term.
That, though, comes with a penalty, Laird noted. If you’re considering renewing early, make sure to weigh the trade off between paying those added costs and your expected savings from being able to clinch a lower rate — and note that those calculations will be based on your forecast of how much higher rates will go at your renewal rate.
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