The changing mortgage landscape

Mortgage qualification

With interest rates rising and housing prices predicted to drop, I’m seeing lenders tighten up on some of their qualification criteria.

When the Stress Test was first introduced in 2016 we anticipated that the stricter qualification guidelines would push more clients from the traditional lending world into pricier alternative options.

That definitely played out, and I expect we will see even more clients having to look for options in the alternative space with the combination of rising interest rates and lenders tightening their belts.

That being said, over the last few weeks I’ve been working on several challenging files that should definitely fit somewhere in the traditional lending world but for a combination of reasons I can’t find the right fit.

After a conversation with one of these clients I sat for a few minutes reflecting on what we had just talked about.

My clients retired early as they own several rental properties on Vancouver Island which provide strong rental income. They have a sizeable investment portfolio. They elected not to start their CPP and OAS as they don’t need the income. Their net worth is nearing $10,000,000.

They are wanting to refinance one of their properties to buy another. Because of the way that lenders do their calculations it looks like the clients are overextended.

Several lenders offer products specifically for High Net Worth clients. Each program has slightly different criteria that the clients must meet. Because the sole source of income for these clients is rental income, I couldn’t get any lenders onboard for their approval.

I find these types of files exceptionally frustrating. Here we have clients that have worked hard all of their lives (they were self-employed and ran three businesses) and invested strategically. Will they EVER miss a mortgage payment? Never.

Will they fit one of the products offered by an alternative lender? Absolutely.

My clients are rate-conscious and fastidious with their finances. Rather than look at an interest rate nearing seven per cent they chose not to move forward at this time.

I have a tough time wrapping my head around the fact that I can’t find them a suitable solution that is reasonably priced.

Towards the end of our conversation, he asked if they started their pensions would that change anything. According to at least one of the lenders I talked to the answer was yes. They don’t need the income and would prefer to wait, so we may revisit this in a year or two.

They then asked if they were still working (with minimal income even) if that would change things. Again the answer was yes.

One of the conversations I have with my clients if they are refinancing or buying and are nearing retirement is about setting themselves up with additional resources before they retire, even if they don’t require any extra funds.

In cases like this I look more closely at mortgage products that offer a combination of an amortizing mortgage and a home equity line of credit. Some people say they are not interested and that is totally fine.

Others that have elected to take a hybrid mortgage have come back years later and said how handy it was to have the credit line readily available. A few of these clients have used money to help their children, and one couple needed the funds to replace a roof and hotwater tank in their home.

It is far easier to qualify for credit when you don’t actually need it than when you are in a financial crunch.

If your mortgage is coming up for renewal and you are nearing the end of your working career, it might be worth looking into adding a credit line as a safety net for down the road.

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


Weighing the options— variable or fixed rate mortgages?

Mortgage rate concerns

On July 13, the Bank of Canada announced an increase of its policy interest rate by a full 1%.

Prime rate is now at 4.7%. This is the largest single increase since 1998 and has many variable mortgage clients questioning their decisions and trying to figure out what to do with their mortgages.

Variable rate mortgages historically outperform fixed rate mortgages over the long haul. It’s easy to say this and feel confident when rates are low but when rates start to trend up then what?

Clients choose variable rate mortgages for different reasons. One of the key reasons I discuss with my clients is the potential penalty if they have to break (pay in full) their mortgage earlier than the scheduled renewal date.

If you are in a variable rate mortgage, your penalty will be three months’ interest regardless of when you break your mortgage. In a fixed rate mortgage, you could be potentially looking at thousands of dollars in penalties. For me this is an important consideration.

Most clients tell me this is a “forever” home and they have no intention of changing their mortgage over their term. But life can throw curve balls.

Some of the reasons that people may need to break their mortgage early include:

• Marriage or relationship ending

• Need to refinance

• Work transfer to a different location (with no need of a mortgage or your current lender isn’t the right fit)

• Windfall such as an inheritance or a settlement

If you are in a variable mortgage right now and are panicking about what rates are doing and how this affects your bottom line, let’s go back and look at the math.

For every $100,000 of mortgage balance you are carrying, an increase in prime of 0.25 per cent increases your payment by approximately $20.82. Even with this increase, over time you will most likely come out ahead, based on historical trends.

When I work with clients making their decisions about fixed versus variable rates, I run the math for them to show the difference in potential interest costs for one over the other. Some clients are most concerned about stability and certainty, and for them that is the right decision.

I mentioned in a previous column that I talk to clients about the difference in payments between the options of fixed or variable and if they decide to go variable, I recommend still putting away the higher payment every month in case rates do go up.

My own mortgage is variable so I’ve had a few moments the last few weeks where I’ve thought long and hard about the best move for me. I keep coming back to the reason I chose variable in the first place and am staying the course.

I don’t have a crystal ball but I do follow several economists. Several have commented we are in for a bumpy few months as the government tries to curb inflation, but we will see interest rates starting to trend back down towards the end of the year or in early 2023.

If you are home shopping and have been working with a broker or banker who pre-qualified you to purchase at a certain price point, it is critical you touch base with them prior to writing an offer to see how this last increase affects your price point.

Up until July 13, we were able to use the Bank of Canada Benchmark rate to determine your mortgage amount if you were choosing a variable rate. With this latest increase in the prime rate, we are now having to use the contract rate plus two per cent. So, in most cases, this will affect the maximum mortgage you qualify for.

The bottom line is if you are concerned about your rate, reach out to your mortgage person.

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

When it comes to your mortgage, don't put off taking action

Last-minute mortgages

Over the last few weeks, I’ve been dealing with two similar situations that have prompted today’s column.

What do I mean by last-minute mortgages? Last-minute mortgages is not an official term, but what I mean is where we are scrambling to find financing to close a purchase or refinance a property.

This first situation is one that provokes a wide range of emotions for me.

I’m working with a couple in the Kootenays who came very close to losing their house due to foreclosure. The irony is, at all times they had almost $200,000 in their investment account at their bank.The husband had a meltdown in the branch one day. He was (by all accounts including his own) out of line. He exploded on a customer service representative over something relatively minor.

The bank sent him a letter explaining that it was severing its relationship with him as a customer due to the abuse that was hurled at the employee. He figured it wouldn’t actually follow through. He didn’t figure it could actually cancel his mortgage. They were still making their payments and had lots of money at the bank.

The couple was dealing with some fairly serious issues at the same time. Her mother died unexpectedly and one of their children was diagnosed with a terminal illness. They were overwhelmed just trying to get through each day.

They did nothing about the mortgage. The bank cancelled their credit card and credit line. Then a letter came from a lawyer representing the bank ,which gave them seven days to pay the mortgage in full or the bank would be proceeding with foreclosure action.

Now, understand this did not happen overnight. We are talking about months of correspondence about the mortgage. Now facing a one-week deadline, the clients reached out for help.

Because they had significant equity in their home, we were able to find a private lender that would pay out the bank. This was not a cheap fix for them. Between the lender fee, broker fee and legal expenses, they spent almost $15,000 to save their home. And they are now sitting in a mortgage at seven per cent while I arrange longer term financing for them.

An alternative lender is the route we have to go as their credit is now damaged because of how this all played out. They are looking at another $5,000 fee, plus another $2,000 in legal bills.

Had they dealt with this right away, they could have walked into another bank and switched their mortgage and would have been out of pocket for a penalty of about $3,000. Instead they are at almost $22,000, not including the higher interest they are paying in the meantime. Ouch.

The second situation was even more last-minute. The clients reached out late one night in a panic. They had a purchase closing two days later and thought their bank had financing in place for them.

They found out that evening their bank was not going to have everything organized in time and told them they needed to get an extension for closing. They reached out to the sellers and there was no possibility of an extension because the sellers were purchasing another property.

One business day, then closing day. During one of the busiest mortgage times of the year.

For these clients, we were able to arrange private financing and close the next day. One day to work on a file that was off the charts hectic but everything came together and it closed on time.

The client called the following day to talk about the fees and interest rate and terms of the mortgage. The fees were high. The legal costs were double what they would normally be. I was actually happy with the interest rate we found for them.

In this case, the clients paid more than $50,000 in fees and legal bills (it was a big mortgage). Had their bank put the financing together in time, they would have spent about $2,000 in legal fees and that would have been it. That was unfortunate for them.

They have a substantial net worth and super clean credit. They were under the impression everything was nailed down. This was an expensive route to go, but possibly losing out on this property, or being sued for not completing the purchase, would have been far more stressful and even more expensive.

If you find yourself in a sticky situation, burying your head in the sand is very tempting but can be very expensive. Dealing with challenges like these head on can feel overwhelming if you are already angry and emotionally drained, but taking action quickly to look into your options may save you thousands of dollars and many sleepless nights.

I am glad we were able to find solutions for both of these clients, and I hope that by sharing their experiences, I am able to save someone else the expense and aggravation that comes by ignoring tough situations.

Also, a quick reminder, if you haven’t already claimed your property tax provincial Home Owner Grant online, make sure you do it today.

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

Dealing with rising mortgage rates

Rising mortgage rates

The mortgage world is not too much much fun lately.

This week, I tried to unsubscribe from all of the rate increase notification bulletins. Turns out that doesn’t stop rates from moving.

As you can imagine, I have a fair number of conversations every day around the impact of the changing interest rates, what is potentially coming with rates and how we can best manage each client’s situation.

As I write this column, many lenders are offering clients five-year fixed rates of 5% or more.

A year ago we were able to place five-year fixed rates at about 1.65%. That’s quite a difference.

Clients who are out house-hunting, and clients whose mortgages are coming up for renewal, are very concerned about affordability.

If you bought a home since mortgage legislation changed in 2016, you would have had to qualify under the stress test. That means (depending on when you actually bought) you were qualified to carry a mortgage based on a rate of anywhere from 4.64 per cent to 5.25 per cent. In theory then, you should be able to carry a higher payment if you have to renew at 5%.

People’s situations change over a five-year term. Ideally your wage has increased and your debts have not. The reality, in many cases, is couples move into a home, then start a family, or buy a new vehicle, or, as Covid showed us, employment changes.

I don’t have a crystal ball that is particularly accurate. There are many economists and experts sharing their thoughts on what is to come with respect to interest rates and the state of our economy.

The economist I follow most closely said earlier this week he feels rates will be bumpy for the next few months then start to trend downwards.

If you have chosen a variable rate mortgage and are now panicking, it’s important to do the math. It is definitely a bit unsettling to hear all of the doom and gloom, but it is key to focus on the reasons as to why you chose your variable rate in the beginning.

Many clients don’t realize they do not have to chose a five-year fixed term. It is the standard offer from most banks and what many clients are most comfortable with. However, you can choose a shorter term if you want the stability of a fixed rate but don’t want to be locked in for too long.

The bottom line is there are ways to navigate through this interest rate environment that may help to put your mind at ease.

Freeing up monthly cash flow by refinancing your home is one option. Even with mortgage rates being a little higher, improving your cash flow by paying off credit cards that are charging higher interest rates may help you sleep better.

Either way, often a call to your mortgage person is the best way to start. See what his or her thoughts are for your particular situation.

A quick call may be all you need to put your mind at ease.

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

More The Mortgage Gal articles

About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order to match the needs of their clients with the right mortgage package.

They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit www.okanaganmortgages.com

Visit their blog at www.okanaganmortgages.com/blog


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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