More borrowers could be at banks’ mercy
January 11, 2019 | Posted by: Mike Garganis
As mortgages come due over the next few years, borrowers will be in for a rude awakening.
That’s because they will be stuck with their lender, unless, of course, they can pass the stress test elsewhere. However, that could prove difficult if rates continue on their upward trajectory.
“Any rate increase or debt accumulation will absolutely affect them because they never qualified under the stress test,” said Doreen Walsh, First National’s regional sales manager for Ontario and Atlantic Canada.
“In five years, people with mortgages up for renewal will be used to it—anybody who refinanced or purchased would have qualified under the stress test—but it’s these people coming due in the next two, three years: they’re the ones who will have a terrible time.”
The trouble for borrowers coming due, but who cannot pass the stress test, is they will essentially be at their lender’s mercy. To put that into context, Reuters last week reported that RBC’s mortgage renewal rates rose to between 90% and 92% during Q2 2018 from around 88% before the B-20 rules were implemented.
“In the next three to four years when some of these mortgages come into play for people who did max out their *GDS and *TDS, and even mortgages today, if they don’t qualify they’re not going anywhere, and let’s face it, banks won’t have to play their best hand at all,” said Walsh. “Lenders have different rates at different times, and clients can take advantage of this, but if you don’t qualify you can’t—period.”
Two hundred basis points could also be too steep for people a lot of borrowers in a rising rate environment, she adds. Given that pensions can no longer be relied upon to carry people through retirement like they once could, people look for residential income like secondary properties they can rent. However, the stress test has rendered that prohibitive for a growing number of Canadians, especially those living in the Toronto and Vancouver areas.
But Frances Hinojosa, managing partner at Tribe Financial, says that shopping for the best rate doesn’t have to be the predication of every borrower’s action plan.
“Yes, B-20 has prevented some clients from shopping around, because it’s possible they may not qualify under the stress test, but there are other options out there for clients up for renewal, which might better suit their lifestyles,” said Hinojosa.
*To a lender, affordability translates into two things: Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS). GDS and TDS are two mortgage formulas that lenders use to determine exactly how much money they are willing to lend you.
Bottom line, it is more important today to work with a trusted mortgage broker who can provide you with optiions, not restrictions. You want options and the best product at renewal time.
Always looking out for your best interest. Feel free to contact me if you have any questions.