Late last week TD announced a rate increase on their posted mortgage rates that took many people by surprise – not so much about the increase, but more specifically by how much. Over the next few days, several other Big Banks announced rate increases on their mortgage products, although not by as much. But what does all this mean, other than the obvious?
Back in November I wrote a Newsletter (here) regarding the New Mortgage Stress tests that took effect January 1, and how that would impact the industry and consumers. We’re now seeing all those things coming to fruition, and it seems the situation may be scarier than many thought it would be. Now, other than the obvious fact that it will be more expensive to get a mortgage with many lenders, there are several other consequences and effects that are coming down the pipe.
Mortgage Renewals
In 2018, there will be a record almost 50% of mortgages renewing/maturing in Canada – this is almost the double the normal annual average. How did we come to this? Well, as mentioned in other posts, we all know the Big Banks manipulate the entire marketplace. We’ve seen the Banks systematically try to structure this entire situation by offering clients discounted 2 and 3 year rates over the last few years, so as to intend those mortgages to renew in 2018. Why would they do that? We all knew the new stress test was coming on January 1, 2018, so the Banks took a pre-emptive approach, knowing that clients would be hard-pressed to renew or refinance their mortgages at other institutions.
Between 60-65% of all mortgages are done through the Big Banks, so they have a pretty strong hold on the overall mortgage market. This means, with the new rules, clients have a much less chance at qualifying for a new mortgage at a different institution, rather than just renewing at their existing Bank (since, renewing doesn’t generally require a new application and having to go through the entire process again – it’s usually just a signature on a document that you agree to renew). This means, when the client DOES renew with their existing Bank, the Bank can gouge them and charge much higher interest rates on that renewal – just because they can!
Penalties
Banks make a lot of money from clients who break the term on their mortgages. People can do that for various different reasons – needing to consolidate/restructure debt, they find a lower rate somewhere else, sell their home, pay for children’s education/weddings, etc…, so lenders build into their contract a penalty that they can charge to clients if the client pays out the mortgage before the end of the term expires. This is mainly because the lender is expecting to make certain profits from those mortgages, and want to make sure they’re compensated if the client doesn’t stick around for the full term. Now, penalties in themselves are not something specific to the Big Banks – all lenders have/charge them. But the difference in how some lenders calculate their penalties vs other lenders can be staggering.
The statistics are that between 70-80% of people will break the term of their mortgage, before the mortgage comes for renewal/expiry – generally after about 3 years (on a 5-year term). This means that those clients who break the term (contract) would generally be subject to a penalty to do so – some lenders will offer to waive or reduce the penalty if you stay with them, but it may not always be beneficial to do so for several reasons, such as being able to get a lower rate elsewhere, having the type of mortgage structure desired, employment/income status, etc…
Let’s assume that a client got a mortgage 3 years ago (on a 5-year fixed term of 2.5% – which is reasonable for 3 years ago), and has a $500,000 mortgage currently remaining. The average penalty that would be charged for one of the big 5 Banks to break that mortgage would be $11,829 – this could be equivalent to almost half a year’s mortgage payments. In contrast, the penalty to break the mortgage on 12 other non-Big Bank lenders with the same situation is $3,902, which is less than 1/3 the cost.
This leaves clients stuck between a rock and a hard place – a) they may not even be able to qualify for a mortgage at another institution, or b) even if they can, they may have to fork out huge penalties to leave their existing Bank.
What are your options?
Luckily, there are still some strategies or options available for clients so as to protect themselves from this gouging. There are still many lenders that provide lower rates, easier qualification, more flexible products, as well as more specified solutions for those with bruised credit or income challenges/non-traditional income (i.e. self employed/business owners). On top of that, there are still a few lenders that have NOT implemented the new Stress Test Rules that the majority of lenders have to (legally) abide by. The rules that were implemented (currently) only apply to Federally Regulated Lenders, which leaves room for some of the Provincially Regulated Lenders to still maintain the old set of rules, therefore not having to apply the stress test and making qualification much easier for clients.
At some point, this may change, but in the mean time, why not take advantage while you still can? On top of that, the rates offered by some of the Provincially Regulated Lenders are often lower than what the Big Banks provide and the penalties are much lower to break the mortgage, so it seems that clients still have some breathing room – at least for the time being. Even if the rate you got at another institution was the same as the rate you would get with a Big Bank, I generally recommend going with a non-Big Bank lender as there’s so many other benefits and generally more flexibility, which will allow you to pay less and get out of debt faster.
Next Steps
We are now over 4 months into 2018 and we are seeing a lot of fear and uncertainty in the markets – not just the mortgage market, but the real estate market and overall market as a whole. It is time to take a pro-active approach and try to make sure you are in the right situation for yourself and your family. In a time where we are at all-time high debt levels, the last thing families want is the added pressure of being able to afford their home and pay their debts. Peace of mind and being able to sleep well at night is very important, and dealing with a knowledgeable, educated and credible professional can provide you those things.
Get in touch with me to go over your options and see if there’s a solution that is right for you. Even a small 30 minute conversation can make a huge difference and potentially save you thousands, if not tens of thousands, in interest or penalty costs.
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