Real Estate Cycle Blues:
Changing Mortgage Policy in Canada.
Real estate is a cyclical game. The market is strong; the market is weak. It’s a buyer’s market; it’s a seller’s market. Interest rates are abusively high; interest rates are unbelievably low. Inflation is rampant; deflation is around the corner. All of these factors affect what Canadian homeowners and investors pay for their dream home or next rental property both in regard to the price of the real estate and the interest rate on the new mortgage. This post is one of a series that I’m doing on the effect of recent restrictions on mortgage financing in Canada.
Currently, the Canadian market has generally been on a tear since the economy started recovering after the 2008 crash. Prices of homes have skyrocketed in BC’s lower mainland and Ontario’s Golden horseshoe, led by Vancouver and Toronto. Houses that cost $1 million in those cities can be had for $200,000 in many other Canadian cities. Nevertheless, economists suggest that the Canadian real estate market is overheated, and the Federal government has used the financial tools at their disposal to pour water on the fire. Along with Canada Mortgage and Housing Corporation (CMHC) and the Office of the Superintendent of Financial Institutions (OSFI), mortgage-lending rules have been restricted on at least seven occasions since 2007. All these restrictions have affected real estate buyers’ ability to qualify for mortgage financing.
One of the changes affecting how lenders lend is a new set of rules known as the International Financial Reporting Standard. One of the rules within the Standard is that lenders should keep an eye on circumstances that would cause a mortgage to go bad.
The key issue is that lenders are now applying circumstantial factors to mortgage renewals.
Anyone in Canada who has ever had a mortgage knows that when the term is up, the lender usually sends a brief letter saying, “Your mortgage term has expired. If you would like to renew your mortgage here are your choices. Please tick the appropriate box, sign at the bottom and return.” That’s it, no re-qualifying for the mortgage, no providing updated financial statements, nothing. Easy renewal.
According to Rob Carrick of the Globe and Mail in an article entitled, “Mortgage Renewals Just Got More Complicated,” renewals are now not near as easy. As of 2018, the mortgage stress testing for borrowers has become more stringent. If your lender has any indication that your credit score has dropped or your home has dropped in value, they may require you to re-qualify or they may charge you a higher interest rate. This is unheard of! For any homeowner in a depressed market or who has hit some financial rough water, it could be disastrous.
Lessons Learned
- Don’t assume that your mortgage will renew automatically at the end of its term.
- Factors like your credit rating or the changing value of a property can affect your renewal.
- Plan ahead for rising interest rates. Could you afford your home or investment property if the mortgage rate was higher?
- Before your renewal date, consider alternative borrowing options in case your current lender will not renew.
If you’re dealing with mortgages in Alberta, get in touch with Barry at RMLO Law LLP in Edmonton today!
“Mortgage” image by Nick Youngson attributed to Alpha Stock Images used under CC Attribution ShareAlike 3.0 Unported.