One of my clients just had her first decent sleep in two years.
In my last column, I wrote about her. She just popped into the office to tell me that her second mortgage had been finalized and all her bills were paid.
And, as a result, she slept – soundly.
We talked about the next step of her plan, which is staying on top of her bills and waiting for her credit score to improve so we can move her back to an A lender.
Over the last 1 ½ years I’ve heard that the intent of the mortgage Stress Test (qualifying clients at the Bank of Canada Benchmark rate or their rate plus two per cent) is to protect Canadians from over-extending themselves.
I talked about that in an earlier column.
In reality, the clients I see who are most impacted by the Stress Test are ones who already own their homes and are looking to refinance to pay off outstanding credit cards and personal loans.
Mortgage approvals have always been subject to a thorough review and approval process; clients need to demonstrate that they are employed (have the financial capacity to repay their mortgage), have a down payment, and have a history of managing their credit.
On the other hand, most people can apply for another credit card or increase their existing limit fairly easily. They can pop in to a car dealership on a whim and leave at the end of the day with a shiny new ride.
This is by no means a simple issue that is solved by tightening up the maximum mortgage amount that people qualify to borrow.
Life happens. People can become over-extended due to changes in life circumstances such as:
- job loss
- the expense of sending a child to college
- or any number of crises.
Since the introduction of the Stress Test, I see more and more clients who are finding that their only option for accessing equity in their home is an alternative lender.
These lenders generally come with a fee and higher interest rates.
Even with the fees and higher rates, alternative mortgage options can be the solution to help clients get their feet solidly beneath them again.
Last week, I attended a learning session organized by CMBA-BC (Canadian Mortgage Brokers Association – British Columbia). Any time I attend training, I come away with something valuable that helps me better support my clients.
One of the speakers was Ray Basi, Director of Education and Policy at CMBA – BC. He explored the pros, cons, and pitfalls of second mortgages.
The fact that our association added this topic to the agenda tells me I am not the only broker facing this challenge.
The Bank of Canada Benchmark rate has increased again, reducing borrowing power again by approximately $2,000 per $100,0000 that people are looking to mortgage (ie: if they qualified to borrow $400,000, that figure is now reduced to $392,000).
I heard last week of an alternative lender now offering a 40-year amortization. Although this might solve the immediate crisis of qualifying clients for financing, I don’t like to see the longer-term implication, which is an increase in interest that clients might pay over the lifetime of their mortgage.
People who are not facing financial challenges are quick to say that if people can’t afford to refinance, they should sell their homes. The irony is that in our market, rent is often higher than what those clients are paying for their mortgage.
Although there are certainly options available, I think we are in for a bit of a rough ride until we adjust to the new way of doing business.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.