Now well into the Bank of Canada’s interest rate hiking cycle, many mortgage owners have yet to feel the full effect of higher interest rates.
But as renewal dates approach, experts say borrowers should talk to their lenders sooner rather than later to discuss their options – though these may be limited.
CHECK IN WITH LENDER
Daniel Vyner, the principal broker at DV Capital, said borrowers should first determine whether their current lender is prepared to offer a renewal. From there, he said borrowers can determine if they want to change lenders.
However, Vyner cautioned that if people find a lower rate with another lender, they will need to pass the stress to test “for that potentially marginally lower interest rate mortgage option.” The stress test proves to financial institutions that a borrower would be able to afford their home if interest rates rise.
“How many of these homeowners are able to actually qualify and stress test for that mortgage? We may find that homeowners are at the mercy of their renewal offer provided to them by their existing mortgage lender if they can't qualify elsewhere,” Vyner told BNNBloomberg.ca in an interview, noting that lenders are likely “aware of this loophole.”
Leah Zlatkin, a mortgage broker and expert with LowestRates.ca, said mortgage owners should pre-emptively reach out to their lender to understand their options at renewal.
At that time, Zlatkin said borrowers can assess if they are able to renew at a different lender or not. Regardless of whether a borrower renews at a new lender or not, she said they will face interest rates that are “substantially higher” than what they are used to.
Lenders could take advantage of the situation and offer rates that are not competitive, she said.
“The bank knows that if you go somewhere else, you're going have to get stress tested,” Zlatkin told BNNBloomberg.ca in an interview last week.
“If they're offering you a rate, they're probably offering you a rate that's going to be the highest that you're going to find in the industry at renewal because they can, because they know that it's a lot more work and potentially people aren't going to qualify to go elsewhere.”
MANAGING HIGHER PAYMENTS
Homeowners with mortgage renewals coming up could prepare for higher payments by either setting money aside, looking for additional income through a higher-paying job or a taking second job, Zlatkin said.
She also suggested that homeowners may want to re-amortize their mortgage.
“You might be at a point now where you've only got 20 years left on your mortgage. Maybe you re-amortize out to 25 years to make those payments a little bit smaller and make it more palatable to pay those monthly payments,” she said.
Some homeowners may want to consider making a lump sum payment at the time of renewal, Vyner said. This could “in theory” lead to lower monthly payments in the future, he said, though he noted that not all mortgage owners will be able to afford this option.
FIXED-PAYMENT VARIABLE-RATE MORTGAGES
As many mortgage owners face looming renewal dates, Zlatkin said the process is an “entirely different beast” for those with fixed-payment variable-rate mortgages than for those with fixed products.
“This is something we've never seen before, where people are coming up for renewal and they may have been really dramatically underpaying their mortgage,” she said.
“They might not have paid very much principal at all down on their mortgage,” she said.
“For many people, this could be a situation where they've been paying excessive amounts of interest, but they really haven't paid off a lot of their mortgage.”
As a result, some people may have amortization periods that are longer than the standard time period of 25 years. Zlatkin said these individuals are due to experience significant increases in their payments and may need to consider a “balloon payment,” referring to a type of loan where the final payment includes a large portion of the original borrowed amount.
“They may definitely have trouble qualifying, especially given that they've had payments that have been fixed for the last (around) two years, while rates have been going up and up and up,” she said.
SELLING AN OPTION
Individuals with fixed payment variable rate products should take time to determine if they can sustain increased payments at renewal, Vyner said. If they can’t keep up with the higher payments, “selling their property might now become a reality.”
While instances of mortgage defaults remain very low, Vyner cautioned that higher rates at renewal could trigger mortgage defaults for some borrowers or incentivize them to voluntarily list and sell their homes.
The biggest driver of home values is the significant “undersupply of real estate,” he said, adding that he thinks any increase in sales of defaulted homes is unlikely to move the market.
“I think it's likely a drop in the bucket,” he said. “It's not rocking the market by any means.”