Mortgage Affordability

Advice For Existing Mortgage Borrowers

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In recent years, the landscape of the Canadian mortgage market has undergone significant changes, presenting challenges for existing borrowers. For a review of the myriad changes and constant government meddling in the market see here - Changes in The Canadian Mortgage Market

Rising interest rates, ever-changing underwriting criteria, and the continuation of the mortgage stress test have made it increasingly difficult for many to afford their current mortgages. Concerns about mortgage renewal are causing anxiety for countless others. If you find yourself in this situation, you are not alone. In this blog post, we will address the challenges you may face and provide valuable guidance on how to navigate these turbulent waters.

Challenges Faced by Existing Mortgage Borrowers

Rising Interest Rates

Interest rates have been on the rise, impacting the affordability of mortgage payments for many borrowers. As rates increase, pressure increases on household finances as the cost of debt soars. Hopes for a decline in rates have recently faded and the mindset in the mortgage market regarding interest rates today is “higher for longer”. Borrowers need to accept that rates will likely remain high for some time. The most optimistic pundits now suggest that rates won’t begin to decline until the latter half of 2024.

As a current mortgage borrower, if you have a fixed rate mortgage with term remaining you are in good shape. If you have a variable rate mortgage, the stress of either higher payments or extended amortization is with you today. With either type of mortgage you need to plan for higher rates on renewal if your renewal date is approaching.

Negative Amortization

For many borrowers at five of the big banks, the static-payment, variable-rate mortgage product is problematic. OSFI has stated they hope to see these mortgage products offered less frequently in the future. Hindsight is 20/20.

With rates higher now, it is estimated that there is over $360 billion of these mortgages in negative amortization in Canada. While those borrowers may not have had to deal with increasing mortgage payments over the past year and a half, they are facing a significant payment shock when their mortgage renews. The banks will want the mortgages returned to their original amortization schedule at renewal. This means that most borrowers will have to either i) make a large lump-sum payment of principal, or ii) increase their future monthly payments by a material amount. Unfortunately, some borrowers will not be able to afford this and may have to sell their homes. Their flexibility will be limited because refinancing into a better situation may not be possible, due to the unnecessary use of the stress test on renewals.

Stringent Underwriting and Mortgage Stress Test

egulators have enforced layers of new underwriting rules onto lenders over the past decade. These changes have been guided by a concern about the risks the mortgage market presents to the financial stability of our financial system. While these risks do exist, the mortgage market has historically performed exceptionally well from a risk perspective. The cause for concern is questionable and, unfortunately, these changes have the greatest impact on those on the lower end of the economic spectrum, who present the least amount of risk to the system.

The stress test and tighter underwriting makes it more difficult for those starting out to enter the housing market. Whereas wealthy homeowners and highly levered investors continue to benefit from inflated housing values, unconcerned about underwriting changes that don’t affect them. We see the efforts from government to tighten the screws on the average Canadian to be economically discriminatory. They advance the few at the expense of the many.

Rule changes from above and a housing market overheated by recent low interest rates, has led lenders to become more cautious. They have implemented stricter underwriting standards for borrowers and don’t deviate from the stress test in their efforts to appease regulators and hold onto existing customers. Even existing borrowers have seen their choices dramatically reduced by the new rules being enforced by the government.

Mortgage Renewal Concerns

For existing borrowers approaching the end of their mortgage term, renewing into a higher rate environment may cause financial strain. The best borrowers who may want to simply remain with their current lender, all face the consequences of higher rates. But what if you do not want to remain with your current lender? What if you want to have options on your renewal?

While the rules imposed by the banking regulator are in place to promote macro-level concerns about financial stability, they can create hurdles for existing borrowers seeking options when their mortgage renews. A simple renewal with your existing lender may be straight-forward but a refinancing with a different lender has been made more difficult because you need to qualify at stress-tested rates close to 8% today.

Even though renewing borrowers do not present a new systemic risk since they are already in the mortgage system, OSFI insists that they be stress tested if they choose to refinance with a new lender. This effectively traps many borrowers at their current lender who does not need to use the stress test at renewal. If there are good reasons for them to leave their current lender, such as poor service or uncompetitive rates, they may not have a choice. At a time when so many borrowers are stressed by high interest rates, such a policy is difficult to justify.

The government has directly limited your mortgage options and choice at renewal which is absurd when you consider how significant a mortgage is to the average Canadian’s finances.

Guidance for Struggling Mortgage Borrowers

Review Your Finances

Thoroughly assess your current financial situation. Create a comprehensive budget that outlines your income, expenses, and debt obligations. Understanding your financial standing is crucial in making informed decisions. You should get a free copy of your credit report from either Equifax or Transunion so you can see what a lender will look at when they pull your credit report. We advise against making any bets that interest rates may move in one direction or another. The focus should be on making sure you can afford the mortgage you currently have and to be prepared for renewal.

A man and a woman are sitting at a table talking to a woman.

Seek Professional Advice

Consult with a financial advisor or mortgage broker to explore your options. They can help you understand the implications of rising interest rates, guide you through the mortgage requirements including the mortgage stress test, and offer personalized solutions tailored to your needs. Even if the best solution is for you to remain with your current lender, a good advisor or mortgage broker can help you make that decision.

Consider Mortgage Refinancing

Refinancing your mortgage might be a viable option. By refinancing, you could secure a lower interest rate, consolidate high-interest debts, or extend your remaining amortization, thereby reducing your monthly payments and easing financial strain. You will need to pass the stress test to refinance with either your current lender or a new lender.

Renewing with your current lender means you do not change the mortgage terms from your existing mortgage contract, you just get a new rate and payment. But if you want to change terms such as increasing the remaining amortization or increasing the balance then you need to refinance. A refinance will require a fresh underwriting where the lender will review your income, employment, credit, and other factors to determine your eligibility for the new mortgage terms you seek. You would also have to pass the mortgage stress test. If you can do all this to find a better mortgage, you might as well shop around and find out which lender in the market can provide you the best rates and terms. This is where a good mortgage broker, like Frank Mortgage, can help. The more choice you have, the more likely you are to find a positive financial outcome.

Guidance for Worried Borrowers Facing Renewal

Start Early and Prepare

Begin the renewal process well in advance of your mortgage term expiry. Early planning allows you ample time to negotiate with your current lender and explore different lenders, interest rates, and mortgage terms, enabling you to make a well-informed decision.

Negotiate with Your Current Lender

Engage in open communication with your existing lender. They may be willing to negotiate your renewal, potentially offering a lower interest rate or more favorable terms, especially if you have a strong payment history.

Consider Fixed vs. Variable Rates

Evaluate whether a fixed or variable interest rate suits your financial situation better. Fixed rates provide stability, ensuring your payments remain constant, while variable rates can offer savings if interest rates decline.

Consider your need for flexibility

Do you plan to own the property for the long-term? If so, a longer-term mortgage on renewal may be suitable, and you can worry less about interest rates and prepayment penalties during the term of the mortgage. However, if you think you might need to move or sell your home in the near future that should factor into your analysis. A shorter-term mortgage might work better. You should understand the prepayment flexibility and prepayment penalty calculations employed by any lenders you are considering and consider fixed vs variable for their penalty differences (variable rate mortgages attract lower prepayment penalties). There are material prepayment penalty calculation differences between lenders, with the big banks usually having the most onerous penalties. For a discussion on prepayment penalties please see here - Mortgage Prepayment Penalties in a Declining Rate Environment

Final Thoughts

Careful planning, thorough research, and professional guidance can help you manage your mortgage needs. Existing borrowers need to be proactive. Don’t leave your renewal or refinancing to the last minute.

With high interest rates, the cost of renewing your mortgage may be a shock. It is in your best interests to prepare ahead of time and shop around for the deal that best fits your personal situation. The more time you have to prepare and the more time your mortgage broker has to understand your situation, the better your outcome. Although, please note that even if you seek advice, the decision is yours to bear. Don’t let an advisor force you in a certain direction. You have the power to make your own informed decisions that will secure your financial future.

If you have questions or need personalized advice, do not hesitate to reach out to mortgage professionals, like Frank Mortgage, who can provide tailored solutions based on your unique circumstances. We are here to help, and your financial well-being is our priority.

We are a simple click Frank Mortgage, or phone call 1-888-850-1337 away.

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About The Author

Don Scott

Don Scott is the founder of a challenger mortgage brokerage that is focused on improving access to mortgages. We can eliminate traditional biases and market restrictions through the use of technology to deliver a mortgage experience focused on the customer. Frankly, getting a mortgage doesn't have to be stressful.

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Impact of Tariffs on Housing and Mortgages

February 27, 2025

Recent news about the United States threatening to impose tariffs on Canadian goods has introduced significant uncertainty into Canada's economic landscape. These developments are poised to impact various sectors, notably the housing and mortgage markets. While the potential ramifications of these tariffs are not easy to predict, we attempt here to identify the issues we should all be considering. The Tariff Threat In early Feb, U.S. President Donald Trump announced significant tariffs on Canadian imports. He talks frequently about unfair trade and has also stated his objective was to address concerns over illegal immigration and drug trafficking into the United States. On February 1, 2025, he signed executive orders imposing a 25% tariff on all Canadian goods, excluding energy products, which were subjected to a 10% tariff. These tariffs were initially set to take effect on February 4, 2025. The US President Trump postponed the imposition of these tariffs for one month, until March 4, 2025. This postponement was intended to provide time for Canada to address U.S. concerns regarding border security and drug trafficking. On Feb 27, the US President confirmed that the tariffs on Canada and Mexico would be put in place as of March 4. This is not good news and hopefully Canadian diplomats can resolve this. Immediate Economic Implications Despite the delay to March 4, and some moves by Canada to address the issues, tensions have escalated. On February 10, 2025, President Trump announced additional tariffs - a 25% duty on all steel and aluminum imports, including those from Canada, set to commence on March 12, 2025. In response, Canada has threatened retaliatory tariffs on U.S. goods, making the prospect of an unexpected trade war between historically good neighbours a real possibility. The US has also said reciprocal tariffs will take effect in April. The situation remains fluid, with ongoing negotiations between the U.S. and Canada aiming to resolve trade disputes and address the underlying issues prompting the tariffs. These measures are expected to disrupt trade flows, elevate production costs, and potentially lead to a slowdown in economic growth. Bank of Canada Governor Tiff Macklem has cautioned that such trade conflicts could curb economic growth, hurt the Canadian dollar, and potentially lead to higher inflation. Impact on the Housing Market The imposition of tariffs on all goods and a retaliatory response from Canada would have several negative consequences for Canadian housing markets. Increased Construction Costs: Tariffs on imported materials, such as lumber and steel, would increase construction costs. Any increase in construction costs would be passed through to consumers, resulting in higher prices for both new homes and renovations. These elevated costs could exacerbate housing affordability issues and constrain the supply of new homes. Market Uncertainty: The prevailing economic ambiguity may deter potential buyers, leading to a deceleration in housing demand. Prospective homeowners might adopt a cautious stance, postponing purchases until the economic and interest rate outlook stabilizes. Job Losses: Higher costs could slow activity in housing development and renovation that could lead to job losses. This could place some current mortgage borrowers and homeowners under stress and take other potential new market entrants out of the market. Tariff Impact on Mortgages The impact that significant tariffs have on the mortgage market could be immediate: 1. Mortgage Rates There are diverging opinions currently about where mortgage rates may go if tariffs are imposed. There are two key channels through which we will see the interest rate impact. Bank of Canada Monetary Policy Adjustments - Most economists agree that a tariff war with the US will slow down the Canadian economy, perhaps sending us into a recession. The Bank of Canada may contemplate reducing interest rates to stimulate economic activity. Governor Macklem has indicated that monetary policy could support demand in the event of a trade war, suggesting that rate cuts might be more substantial than previously projected. However, many have cautioned that interest rate cuts may not have a meaningful impact on an economic slowdown resulting from higher costs due to tariffs. While the Bank of Canada may not be able to effectively offset the negative impact, many analysts, including those at the Bank of Montreal, think they might cut rates by as much at 1.50% this year if the US imposes the full 25%, across-the-board tariffs. This would significantly reduce variable mortgage rates, which would be beneficial for mortgage borrowers. Bond Yield Fluctuations - Escalating trade tensions have already led to a decline in Canadian bond yields, with the 5-year bond yield reaching its lowest point since June 2022. Bond yields often decline in advance of economic weakness. A downturn in bond yields is often followed by a decline in fixed mortgage rates, potentially offering relief to borrowers. 2. Reduced Market Activity The tariff talk creates tremendous uncertainty. The old saying is ‘uncertainty breeds contempt’ and we are seeing that in the reactions many are having to the tariff threat as well as in declining consumer confidence in survey results. We may witness a slowdown in housing and mortgage market activity with new buyers, movers, and investors exercising caution until the tariff issue is resolved. 3. Mortgage Defaults Economic weakness usually leads to worsening performance in mortgage portfolios. Job losses, loss of confidence and narrowing options will lead to an increase in mortgage defaults as borrowers struggle to meet obligations. We have already recently seen an uptick in consumer credit defaults and mortgage delinquencies have been increasing. Despite this concern, Canadian mortgage portfolios have performed well during prior downturns. The legal structure and culture in Canada promote good payment behavior and Canadians always do whatever it takes to keep their home.

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Owner-Occupied Rental Property

By Don Scott • February 11, 2025

Purchasing an owner-occupied rental property in Canada can be a strategic way to build wealth while securing a home for yourself. But if you’re planning to put down less than 20% of the property’s purchase price, you’ll likely need mortgage default insurance. Here’s what you need to know about how mortgage default insurance works for owner-occupied rental properties.

Canadian Mortgage Rate Forecast For 2025

By Don Scott • January 10, 2025

What are Canadian mortgage rates going to do in 2025? We do not have a crystal ball, and the markets are sending mixed signals right now. However, we do think that more rate cuts are coming but are concerned that fixed mortgage rates are near their floor. What might all this mean? – read on. 2025 Mortgage Rate Prediction We expect variable mortgage rates to decline a further 0.50% to 0.75% in 2025. This will bring them below fixed mortgage rates for the first time since 2022. It is historically the norm for variable mortgage rates to be below fixed mortgage rates. This means five-year variable mortgage rates could be in the range of 3.6% to 4% by the end of the year. We do not expect much change in fixed mortgage rates in 2025. Bond yields have modest rate cuts already priced in and are resisting further declines. The recent steep increase in the US 10-year bond tells us that the bond market thinks central banks are wrong to cut rates further. We must pay heed to those signals since fixed mortgage rates depend on the bond market. We anticipate five-year fixed mortgage rates to range between 3.8% and 4.5% for most of the year. We can only rely on market inputs to generate our own expectations for mortgage rates in 2025. Those key inputs include: The Bank of Canada has indicated more rate cuts may be coming in 2025, but the pace and size of the cuts will be more gradual; Economists are forecasting a weakening Canadian economy. When the economy weakens, the central bank tends to cut rates to provide economic stimulus; The US Federal Reserve has stated they are in no rush to cut rates; The US 10-year bond has risen by 0.85% since the Federal Reserve began cutting rates in Sept 2024; Canadian 5-year bond yields are unchanged since August 2024 and only 0.15% lower than in mid-Jan 2024; US Federal Reserve reluctance to cut rates may limit how much the Bank of Canada can cut. When the Bank of Canada cuts rates more than the US does, it hurts the value of the Canadian dollar; and Analysts in Canada and the US expect rate cuts in 2025. There are many risks that are not priced in yet that could materialize. Economic weakness will increase the likelihood of more rate cuts and could even reduce bond yields. Economic strength will eliminate the need for rate cuts and could even lead to higher rates. There are also political and geopolitical risks that are not our place to opine on. They are difficult to predict but could significantly impact our interest rate markets in 2025, a year currently marked by uncertainty. What Happened to Mortgage Rates in 2024? The Canadian market entered 2024 with high expectations for multiple Bank of Canada interest cuts, starting as early as March or April. The cuts came a bit later than anticipated, with the first cut on June 5. We saw cuts totaling 1.75% from June through December. The last two cuts, in October and December, were consider ‘jumbo’ cuts of 0.50% (the usual cut is 0.25%). These cuts had the expected direct impact on variable-mortgage rates which dropped by the same amount. Fixed rates are ‘forward-looking’, so they move when expectations change. As the chart below shows, they dropped in anticipation of the cuts but, once the rate cuts gathered steam later in the summer, they remained relatively flat.

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