More than one million Canadians got historically cheap fixed-rate mortgages from June, 2020, to September, 2021. We’re talking rates like 1.99 per cent or less.
In fact, at the very bottom in February, 2021, deep discount mortgage brokers were selling insured five-year fixed mortgages as low as 1.23 per cent.
Rates like that are pure gold. No mortgagor wants to give that kind of rate up when the cheapest five-year rates today are near or above 5 per cent. That’s altering the decision-making of potential homeowners across the country.
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How to buy without losing your bargain-basement rate
At this very moment, scores of homeowners with sub-2 per cent fixed rates want to upgrade to a new home. But they also want to hold on to their current rates for dear life.
Fortunately, there’s a way to do it. It’s called “porting,” or changing your mortgage so that it’s secured by your new property.
Most lenders let you port your mortgage to a new property and keep your stellar fixed rate. But there are some catches.
For one thing, you have to reapply and requalify. That means the lender will reassess your income, credit and debt-to-income ratios all over again.
This can make porting a challenge for anyone who:
- Makes less income today than when they got their last mortgage
- Is self-employed and had temporary income loss in the past two years (most lenders want to see sufficient income in your most recent year and over a two-year average)
- Is porting from an insured mortgage to an uninsured mortgage, or to a property over $1-million (some mortgage finance companies don’t allow this, meaning you have to break your mortgage and pay a penalty)
- Has a big gap between the dates of their new purchase and the sale of their prior property (some lenders give you 90 or 120 days to port, but some only let you port if the old and new property is closing on the same day, which is ridiculously difficult to arrange)
- Has seen their home price plunge, such that they can’t sell their current home for a high enough price to generate a sufficient down payment on their new home
- Needs a bigger loan (some of the more restrictive lenders out there won’t let you increase your borrowing without breaking the entire mortgage, which entails at least a three-month interest penalty and the loss of your rate. That’s a problem if you buy a more expensive property and need a bigger mortgage)
- Had credit problems (for good terms, you need to keep your credit score above 680 or 720 minimum, depending on the lender)
- Has housing and debt payments that eat up a large share of their income (prime lenders generally want to see your total housing and debt payments at less than 44 per cent of your gross monthly income).
“People are paralyzed from fear of falling home prices and that’s keeping many from moving at all,” says Shawn Stillman, a mortgage broker and co-founder of Mortgage Outlet. “Of the people who still want to port their mortgage, most don’t even know these problems exist until they apply and find out they don’t qualify.”
That last point above, regarding your debt-to-income ratio, is what stops the most borrowers from porting their mortgage.
The reason: the government’s mortgage stress test. It requires that today’s borrowers prove they can afford payments based on rates that are 200 basis points above actual rates. Considering the roughly 300-bps runup in fixed rates, that means stress test payments are now based on 7.14 to 7.69 per cent for prime fixed-rate borrowers. (There are 100 basis points in a percentage point.)
Given 69 per cent of homebuyers purchase the maximum home they can afford, according to Canada Mortgage and Housing Corp., and given incomes haven’t kept pace with the cost of living, stress test rates that now top 7 per cent often push borrowers’ debt ratios over the limits, making it impossible to port.
Many such borrowers could get approved with a non-prime lender that’s more flexible on income proof, credit and debt ratios. But again, many are simply not willing (or able) to replace a rate such as 1.99 per cent with a 5.14-per-cent rate – let alone a non-prime rate like 6.44 per cent.
This phenomenon is killing innumerable potential home sales and will continue to do so for at least a year or two.
Inflation strikes again
Bond yields rocketed to a five-year high after Wednesday’s disappointing inflation report, which saw average core inflation stay stubbornly high at 5.3 per cent. Fixed-rate watchers know what that means: more rate sorrow for new borrowers.
Barring reversal, virtually every fixed rate in the country could be above 5 per cent by next week. That means stress test rates are going up as well.
As of Wednesday, the lowest stress test rate in Canada was 6.75 at Canadian Imperial Bank of Commerce, based on CIBC’s 4.75 per cent six-month fixed rate. Compared with most stress test rates in the mid-7-per-cent range, this rate theoretically helps someone qualify for a mortgage that is 5 to 6 per cent bigger.
That said, I suspect CIBC’s six-month rate may not be around long.
Rates in the accompanying table are as of Wednesday from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
