Welcome to the latest edition of Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister.
If you’ve got at least 20 per cent home equity and want to switch lenders, here are a few “tricks” to get a better mortgage rate.
The key, however, is that your mortgage be default-insured. That’s because mortgage rates are often lower on insured mortgages. And you don’t necessarily have to pay for that insurance - many lenders will buy what’s called portfolio insurance on your mortgage and pay for it themselves.
The challenge for borrowers is that insurers have a slew of rules that often prevent them from qualifying for this insurance. Many of those rules came into effect in the fall of 2016.
Fortunately, there are little loopholes that can help people qualify for an insurable mortgage, including something called “grandfathering.”
Grandfathering essentially means that if your existing mortgage complied with insurance rules at the time you got it, you can often switch to a new lender and qualify for insurance — even if the mortgage no longer meets certain insurer rules today.
This typically comes into play when borrowers are changing lenders to get a better deal. Because portfolio insurance allows for lower mortgage funding costs, the rates you get with an insured mortgage are often 10 to 20 basis points lower than regular uninsured rates. (There are 100 basis points in a percentage point.)
What to Look For
If you want to switch lenders to lower your interest costs or improve cash flow, here are four ways to bag a low-cost insurable mortgage:
1. Beat the $1-million limit
Properties over $1-million normally don’t qualify for insurance. But if your home was under the $1-million limit at the time you got your mortgage, you can potentially be grandfathered.
2. Roll in your HELOC
Refinancings cannot be insured, but there’s one exception. If you’ve got a mortgage linked to a home equity line of credit (HELOC), known as a “collateral-charge mortgage,” you can switch to a new lender and combine that mortgage and HELOC borrowing into one new low-rate insurable mortgage.
3. Switch a formerly 30-year mortgage
Mortgages with amortizations over 25 years cannot be insured. The maximum amortization is the lesser of the remaining amortization schedule or 25 years, CMHC says. That means, if you originally had a 30-year amortization that’s now down to 25 years or less, you can still switch into an insurable mortgage.
4. Pass an easier “stress test”
Insured mortgages normally require that you qualify at the new and tougher government-mandated minimum qualifying rate. In other words, you must prove you can afford a payment based on a prescribed interest rate, at least 5.25 per cent currently. If you can’t pass this test but you got your mortgage before Oct. 17, 2016, some lenders let you qualify at their actual five-year fixed rate. That reduces your debt ratios on paper and makes it easier to get approved.
All the above scenarios assume you are:
- an otherwise qualified borrower
- switching to a new lender
- have at least 20 per cent equity in your house
- not increasing the risk of your mortgage (e.g., not increasing the loan amount or amortization).
If your circumstances match one of the above cases, ask a mortgage broker if they have an insured lender that can get you a better deal than your current lender. And ask if they’ll pay your switch costs while you’re at it.
Mortgage Penalty Lawsuits are Usually Futile
If you broke your mortgage early, paid a huge mortgage penalty and blame your bank, think twice about suing. A high-profile class action lawsuit against CIBC is now pending court review for settlement. The claimants, including some who paid five-figure penalties, are expected to get just $224 each. Courts refused most of the lawyer’s claims, with an exception being the wording that gave CIBC “discretion” on the mortgage “comparison rate” it used in its penalty calculation.
Courts have consistently found that mortgage penalties don’t need to reflect only the lender’s lost interest from you breaking early. With a properly worded contract, and you can bet that bank lawyers have now re-reviewed all their contracts, banks can charge penalties that are higher than necessary to make themselves whole. And several do.
Rates This Week
The lowest nationally advertised rates mostly held steady this week.
Things are more interesting on a regional basis where online brokers in some provinces, such as Butler Mortgage and CanWise Financial, have launched default-insured variable rates as low as 0.85 per cent. That’s a new all-time low for Canadian mortgage rates.
This & That
- HELOCs are in the bank regulator’s crosshairs. I expect the Office of the Superintendent of Financial Institutions (OSFI) to impose stricter rules on HELOCs in 2022. That could possibly include higher capital requirements that compel banks to be more selective with who they give HELOCs and/or reduce credit limits on new HELOCs.
- Or regulators could require banks to factor in an artificial monthly payment on a borrower’s HELOC, even if there is no actual payment required because the HELOC is unused. That could increase a borrower’s debt ratios on paper and make it harder to qualify for financing on other properties. Those who’ve seen a big runup in their home equity and want a HELOC might be wise to apply sooner than later if they’re on the bubble of qualifying.
- The bond market is pricing in just a 3.5-per-cent chance of a rate hike at next Wednesday’s Bank of Canada meeting, according to data from Refinitiv. Investors expect the first 0.25-percentage-point hike in April, and a total of five in 2022.
- It would take six Bank of Canada rate hikes of 0.25 percentage points for payments on the lowest national variable rate to exceed payments on the lowest five-year fixed rate—assuming a standard mortgage with a 25-year amortization.
- Policy makers have drastically curtailed the use of mortgage-default insurance in Canada. CMHC reports that only 35 per cent of residential mortgages at banks were insured in the first quarter, compared with a whopping 60 per cent in 2012.
Robert McLister is an interest rate analyst, mortgage strategist and columnist. You can follow him on Twitter at @RobMcLister.