Strict Rules Give Banks Hold On Consumers
Staunch new mortgage rules may put some consumers in a sticky situation if they are hoping to switch banks.
Canadians have already felt some impact from mortgage rules that went into effect this past April, partly because most financiers put these changes into place well in advance of the deadline. Canadian borrowers are taking out more fixed-rate mortgages of five years or more due to the ease of qualifying for them.
For mortgages running four years or less, both fixed and variable-rate, the consumer must be able to pay a rate that is based on the five-year fixed rate that is posted; currently this rate is 6.1%. Longer mortgages convert to the rate on the contract, and can be as little as 4.6%. But no more than 32% of the consumer’s gross income can be taken up to cover both principal and interest on the mortgage, as well as the cost of paying to heat the home and paying the property taxes on the home.
But there is a slight wrinkle in the new mortgage rules. Anyone who is shopping for a better rate on their mortgage is forced to re-qualify based on their current credit record. If you stay with the same bank, there is no check of your credit. For some folks, this is not just a loophole – it actually has them in a headlock with their bank as their declining credit score may prevent them from qualifying with another institution.
The Canadian Association of Accredited Mortgage Professionals found that most consumers (almost eight out of ten) simply sign their renewal notice from their banks; the remaining consumers are those who look to switch in order to get a better rate.
Those consumers looking to exercise their right to switch may find that it harder to qualify for a mortgage now as compared to just a month ago.
Point in case, just two years ago, the average consumer could buy a home without putting any money down under a forty-year amortization schedule. And if that consumer made regular monthly payments on their mortgage, they would have paid down nearly five percent of the principal after a mere five years. The same consumer in today’s market would be considered high ratio and thus subject to requalification if they decided to go with another bank.
Experts say that the majority of first-time homebuyers with a five percent down payment or less will not be able to meet the restrictions of the requalification process with another bank. And many of those buyers were qualifying for their mortgages based on the three year rate, which is around two-hundred basis points lower than the current rate for qualification.
And if houses prices go down, which is a possibility that is being suggested in the real estate industry, then consumers would be hit with an even bigger blow. This would mean that an even greater number of homeowners would be considered as high ratio upon renewal due to the fact that they do not have twenty percent equity in their home, which is a test that is used during the requalification process.
This leaves a portion of the borrowing population literally tied down to their bank because of the new rules.
