Note: Changes to the Canadian mortgage stress test in early 2020 may affect the relevance of this article.
Renewing a mortgage this year might be a little scarier than in years past, due to recent mortgage rule changes, but don’t sweat it. Despite what your current lender may tell you, you are still able to shop around for the best rate. You’ve got this and we’re here to help.
How has qualifying for a renewal changed?
The Canadian Government announced a new mortgage stress test in Oct. 2017 that went into effect Jan. 1 2018. It requires all homebuyers to qualify at the greater of either the Bank of Canada’s posted five-year mortgage rate (currently 5.34% at press time) or two percentage points more than the contracted rate (the mortgage rate a buyer pays).
Well, that stress test doesn’t only impact purchases; it must also be passed for mortgage renewals.
That is unless you renew with your existing lender.
So many current homeowners may fret about having to pass the test and, as a result, choose to stay with their current lender instead of shopping around for a better mortgage rate at renewal.
That would be a mistake, according to James Laird, president of CanWise Financial.
“The truth is that it’s very rare, even with the new stress test, that you would have qualified five years ago and not today,” Laird says. “97% of people with a mortgage up for renewal would be able to pass a stress test and move to another lender. But it’s going to be perceived as more daunting.”
Despite this, Laird suspects some lenders will mention the stress test – and lack thereof if the client renews with them – when sending out renewal letters this year.
“From a marketing perspective, the existing lender can talk about you not having to pass a stress test to stay with them,” he says.
He estimates that 85-95% of people renew with their existing lenders and this messaging will encourage many to simply sign on the dotted line with their current lender once again. The problem, though, is that these people could be willingly signing on to pay more than they need to.
With that said, here are some things to think about when preparing to renew your mortgage.
The key is to shop around — just like you (hopefully) did when first purchasing your home. And start early to ensure you qualify.
Don’t wait for the renewal slip from your current lender; by then it will seem like time is running out and you’ll be more likely to just accept the renewal rate they offer (which will likely be much more than you should be paying).
Start searching four months before your term is up. Why four months? Because 120 days is the window lenders typical allow you to renew your existing mortgage without incurring a prepayment penalty.
This will also give you plenty of time to search around for better offers from other lenders to make sure you have all the power when renegotiating with your current lender if that’s what you decide to do in the days prior to your renewal deadline.
Compare today's top mortgage rates
Take financial stock
It’s likely that five years have passed since you last signed a mortgage contract (the majority of mortgages in Canada are for five-year fixed rate terms) and your life may have changed drastically over those years.
How have your financial goals changed? Are you planning on staying in your home long-term? Are you hoping to take some equity out of your home in the near future? These are things you should consider before choosing your next mortgage term and rate.
Speaking with a mortgage broker can help you figure out the best mortgage for your individual situation.
Crunch the numbers
Figure out whether or not you’re likely to pass the stress test if you choose to renew with a new lender. A mortgage broker can help you with the math, but we’ve put together a couple scenarios to get you started.
SCENARIO 1 – 39% GDS in 2014
A borrower with a household income of $80,000 could qualify for a home valued at $601,770 with 5-year fixed mortgage rate of 2.80% in 2014. This is assuming a 20% down payment of $120,354, annual property taxes of $2,950 and monthly heating costs of $125, as well as a 39% GDS.
At the end of their mortgage term, the remaining principal on their mortgage would be $409,895, assuming a 25-year amortization.
If they renewed at the same rate (2.80%) in 2019 their income would now have to be $96,620 in order to pass the stress test. This is a household income increase of 21% in 5 years.
According to statistics from The Conference Board of Canada, the average salary increase for non-unionized Canadian employees hovers around 2.5 to 3 per cent per year, depending on the sector. This doesn’t account for job changes, which can often net a sizeable salary increase for workers.
SCENARIO 2 – 35% GDS in 2014
If a borrower with a household income of $80,000 in 2014 capped their max affordability at 35% rather than 39% GDS, they would qualify for a home valued at $529,800. This assumes a mortgage rate of 2.80%, 20% down payment of $105,960, annual property taxes of $2,950 and monthly heating costs of $125.
At the end of their mortgage term, the remaining principal on their mortgage would be $360,873, assuming a 25-year amortization.
If they renewed at the same rate (2.80%) in 2019, their income would only have to be $86,428 in order to pass the stress test. This is an 8% increase in 5 years, which is in line with salary inflation trends in Canada.
Compare today's top mortgage rates
The bottom line
Over the past few years, you’ve learned a lot. You now have a better idea of what you want in a mortgage; would you prefer an open mortgage that allows you to make larger lump-sum payments without incurring penalties? If so, make sure you look for a mortgage that allows for those sorts of lump payments.
If you plan on moving in the next five years, you will want a portable mortgage.
With all that said, remember you aren’t locked in with your current lender. While they may try to keep your business by inciting fear of the stress test, remember there is a very real possibility you will not only pass that test if you choose to switch lenders but that you might save some money as well.