Mortgage renewal 'sticker shock' prompting difficult decisions

Mortgage renewal options

Photo: Pixabay

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.

The impact of wildfire on mortgages

Mortgages in a time of fire

Photo: Neil K. Lalach

The McDougall Creek fire on the night of Aug. 17.

This week it feels like almost every conversation starts with a question and answer and fire update.

I am very fortunate in that my family lives just outside of an evacuation alert area, so we did not have to leave our home. This has not been the case for many of our friends and neighbours.

The first few days were chaotic and truly frightening. After a few initial adjustments (aka moving my horses a little further from the fire) and packing my trailer in case we had to leave, we’ve settled into an uneasy routine.

Looking at the B.C. Wildfire app on my phone, the entire province basically shows up as red at this point which means there is an active fire somewhere nearby. I have spent the last few days trying to connect with my clients who either live in an active fire zone or have a purchase finalizing in the near future. There have also been a few very heavy conversations with people who have lost their homes.

If you are a homeowner and have been affected by the fires, please reach out to your mortgage provider. I see emails every day about how lenders are stepping up to offer support and relief to their clients.

I am checking in with clients who have mortgages finalizing soon because part of the purchase process is organizing insurance coverage for your new home. This is a condition you need to address before you remove all of the conditions on your purchase and make it a firm and binding contract. Timeline-wise, this means you research insurance packages and obtain an undertaking to insure within the first few days of writing your offer.

The fine print includes verbiage that essentially states the insurer will not insure your home at closing if certain conditions change. One of those conditions is a wildfire within a certain radius of your new home. Most times your closing is weeks, or even months, down the road.

Most clients firm up their insurance coverage a few days prior to the completion (finalizing) of their purchase.

The good news is every purchase contract I’ve seen over the last few years includes a “force majeure” clause. This clause extends the contract when the parties cannot complete the purchase due to a catastrophic event such as a nearby fire.

The other good news is that there are still companies that will offer new insurance policies for homes closer to fire zones. The bad news is that they are considerably more expensive.

The tradeoff for everyone I’ve talked to so far is that they have everything organized to leave their current home and if they do not move forward with their purchase they will be scrambling for a place to live.

If you have a purchase closing soon I recommend you double-check that the insurance company you originally connected with is still willing to provide coverage for you. This way you will not be left scrambling a few days before your closing date.

•••

Straying from mortgages, I want to share a few thoughts and observations.

I have been overwhelmed by the reach-outs, check-ins and offers of support from friends near and far. I have heard amazing stories of people helping each other and opening their doors to strangers.

I have also heard stories about people taking time off work to volunteer where needed in our community and have also heard through the grapevine that our local food banks are in tremendous need of support. They have been helping so many families who are out of their homes and struggling to keep things right-side up.

I am very thankful for the friends who took my horses on short notice. I’m thankful for a support network that has kept me sane over the last week. I have seen many shining examples of people helping each other day after day.

I am so incredibly grateful for the men and women who have been working tirelessly to save our community.

Thank you for all you do.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Challenging times in the world of mortgages

Mortgage criteria increasing

Photo: Pixabay

Sometimes, when I sit down to write my column, I struggle to find a topic that I’d like to write about. Other times, like today, I have a clear idea of what I’d like to say.

For the most part, I love what I do. I enjoy meeting and working with my clients, and there is something to learn every day. Many days I come across a new product or lender, changing guidelines that offer better solutions for my clients or ways to enhance my process.

The last few months have been challenging for everyone in the mortgage world. With rates continuing to rise and no noticeable drop in housing prices, many clients are finding it tough to qualify to purchase a home. More troubling for me is seeing more families struggling to make ends meet.

I feel like many lenders are hunkering down and tightening their belts. Some are running short-handed or operating with many new staff members who are trying to learn the ropes.

Over the last few weeks, I’ve had conversations with two of my favourite lenders about changes behind the scenes.

On overall strong files (not high-ratio insured files) there are lenders that will consider exceptions if the numbers are not where they need to be. What that means is that in cases where clients have significant equity in their home and a clean credit history, these lenders will allow the numbers to go a little higher than their published guidelines.

Over the last few weeks both of these lenders have had policy changes limiting the exceptions they can ask for and approve.

Files I would have been confident submitting even two or three months ago are now being declined if the ratios are out of line. I understand the logic, these files are a higher risk to the lender. However, particularly with refinances, the new mortgage payment will actually put the clients in a far better position with respect to cash flow.

Equally frustrating, it feels like lenders are becoming even more particular with their document requests. As an example, specialty programs designed to provide solutions for high net worth clients require every document you can imagine, plus a pint of blood. (The pint of blood was not really asked for, although I did have one client comment who figured a full cavity search was coming next.)

Being the intermediary between a client who doesn’t want to provide any more information and a lender that requires it is a balancing act. I understand how clients can feel the document requests are over the top and intrusive.

Putting myself in the lender’s position, I understand why they want to be confident in their clients before handing over mortgage funds. They have no interest in foreclosing on properties – their income comes from collecting interest on their mortgage funds.

When I start working with clients, I do my best to explain how particular lenders can be with respect to the documents they ask for. I find it very frustrating to have to explain and justify what we are asking for.

The other challenge with staffing levels at certain lenders is it can take them four or five days to review and sign off on documentation submitted. There are some lenders that are easier to work with in terms of documentation, but the tradeoff can be higher rates or slower turnaround time.

The mortgage world is certainly challenging right now but the positive news is lenders are constantly looking for better options for their clients.

My suggestion is to have all of your paperwork organized and a mortgage pre-qualification in place well before you move forward with writing an offer to purchase a home. Take your time and educate yourself as much as you can.

Choose a mortgage professional who is able to help educate and support you as you navigate your mortgage application.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Plan on getting into the housing market? Consider an FHSA

First home savings account

Photo: Contributed

Whether it is your first or subsequent venture into the housing market, it will likely look a bit different than it did even a few years ago.

Rising interest rates and changing qualification rules mean you may have to wait a bit longer, or rely on help from family.

This week I had a call with a young lady that is looking to buy a home in the Okanagan. She said she has been saving her down payment but feels like it will take a while to save enough. She also said she needed some help trying to figure out a game plan.

What I most appreciated about the call was her realistic approach. She said she felt it would be two to three years before she would be ready to move forward with a purchase and wanted to make sure she was doing everything she could to get ready.

The same day I sat in on a learning session about the First Home Savings Account (FHSA). Starting April 1, Canadians can contribute up to $8,000 per year to a maximum of $40,000 to be used towards the down payment on a home.

The contributions are tax deductible.

Who can open an FHSA? You must be:

• Between 18 and 71 years of age
• A resident of Canada
• Considered a First Time Home Buyer

How do you open an FHSA?

Contact any FHSA issuer. This can be a bank, credit union, or a trust or insurance company. They will be able to advise you as to what type of savings or investment products your money can be invested in.

The funds in your FHSA can be combined with funds withdrawn from RRSPs under the Home Buyers Plan (HBP) to be used towards your down payment. The total between the two would be $75,000 or $150,000 per couple.

These may seem like pie-in-the-sky numbers, but even leveraging the plans for part of those funds may help significantly with the purchase of your home.

Saving your down payment can be a real challenge, particularly if you are renting. The cost of living is increasing and making it more difficult to tuck money away. When life happens it can be tempting to dip into your down payment savings.

A significant advantage to opening a FHSA or contributing to your RRSP is that it is not so easy to dip into your down payment savings. Perhaps an even more significant advantage is that your contributions are tax deductible which ultimately helps your savings plan.

Check out highlights of the First Home Savings Account here.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.