What should contribute to the decision to refinance your mortgage? Here, we review the key factors to consider.
We’re not going to sugar coat it folks, the new mortgage regulations are tough! The new regulations and “stress tests” are the hardest to hit the Canadian mortgage industry yet! We want you to be prepared for what could be the new norm. It’s time to talk about alternative lenders!
What are these regulations?
The new regulations brought in requires all conventional mortgages (more than 20 per cent down payment) to qualify at the greater of Bank of Canada’s (BoC) rate of 5.14 per cent or the contract rate plus two per cent. Whether you’re negotiating a refinance or purchasing a new home with over 20 per cent down payment, you will be qualifying on these new rules. This is huge, but we aren’t surprised. It was only on Oct 17, 2016, that high ratio purchasers (less than 20 per cent down payment) had to qualify at the BoC benchmark rate of 5.14 per cent.
Let’s remember that we have been in times of historically low interest rates!
It was only just over 10 years ago in 2007 when the BoC’s prime rate was at over six per cent! The prime rate has eight announcements per year, which can affect variable-rate mortgage holder’s payments. When the rate increases or decreases, as would the mortgage payment. Outside of the last 10 years, the last time the prime rate was below 5% was in 1956. In that context, it makes our rates still so low!
What does this mean for me as a current home owner?
If you currently own your home, you are not at a total loss yet. If you have an abundance of income and little debt you are a great candidate for income qualify if you need to adjust your mortgage. Whether this is for rate, a better or preferred mortgage lender, or you just want to take out extra funds for that new kitchen you need. Where we do run into trouble is if you cannot income qualify and need to renew with your current lender. Your current will offer you a renewal on the maturity date of your mortgage, but when they do so they don’t always offer you the best rates that are on the market. The main reason for qualifying for a new mortgage would be insufficient income, poor credit, or just having a bit of debt, which we all do.
How do alternative lenders play into this?
When you do not qualify anymore with a traditional lender, you have more options! An alternative mortgage lender will lend to you! They know most Canadians have debt at some point in time and getting rid of it can be hard. With refinancing your home and rolling your high-interest credit card debt into your mortgage at a new lower interest rate, you are going to be saving money every month.
Here’s the catch.
Alternative lenders will look past the fact you don’t qualify traditionally and give you a chance, but of course, just like any risk they hedge this by means of higher interest rates passed onto you as the mortgage consumer. The average rates for alternative lending can range from 5- 12 per cent, depending on your individual financial situation. When the new regulations went into effect this displaced 20 per cent of consumers who could’ve qualified on old lending guidelines. Now, these home owners only have the option to renew or to find an alternative.
Are alternative lenders bad?
No way! They may have slightly higher interest rates but if you need to rebuild your credit or to get rid of the debts lingering above your head, consider them a saviour. Without alternative lenders in our market to accept this type of financing, it wouldn’t be long before many home owners find themselves between a rock and a hard place.
As unbiased mortgage professionals, we look not only at the traditional but also the alternatives. Here at the Clinton Wilkins Mortgage Team, you’re part of our family and we take care of our own. After all, we are always looking out for your best interests.
Have more questions? Feel free to contact us!