Hugo Dos Reis
2018 has been a historic year for mortgage rule changes and policy tightening. We kicked off the year with the “Stress Test”, impacting the way Canadians qualify for mortgages by increasing the criteria lenders use for mortgage underwriting. This change alone reduced overall borrowing capacity by an average 30%. Meaning, that borrowers are now able to borrow on average 30% less than in 2017. As the year went on, additional policy changes were introduced, mainly for rental property qualifying. Many lenders changed their internal policies around how many rental properties clients can qualify for AND the criteria required to get approved for rental properties. Some investors have completely removed themselves from offering rental property solutions altogether, forcing investors to look elsewhere for financing options.
Another monumental rule change that hasn’t been discussed enough in the Canadian media is the introduction of IFRS 9. This policy was an international initiative introduced by the International Accounting Standards Board or IASB. It affects all international financial institutions (FI’s) and, in a nut shell, requires that all FI’s keep larger reserves for lending purposes and also demands that FI’s place more due diligence on their existing mortgage portfolios to manage risk exposure.
What this means for clients is that we expect lenders to be more critical when it comes to mortgage renewals. Typically, when a mortgage matures clients receive renewal letters in the mail with several options to check off and sign back. Very little, if any, documents are provided by clients in this scenario. With IFRS 9, lenders will now apply more conservative measures to ensure their clients mortgages continue to qualify under their lending programs. For most this could be a simple soft credit check on maturity that confirms that the clients credit bureau is clean and good for a renewal. In some cases, the soft credit bureau review could indicate that the client has taken on much more mortgages, possible missed payments etc which could require that the lender now complete a full mortgage application to ensure client can still qualify. If the client can qualify then traditional renewal options are provided. If the client no longer qualifies, lender can offer a much higher renewal rate (to manage their now higher risk exposure) OR in some cases require that the client renew with another lender. For 2018 alone, we’ve seen at least a half dozen clients who weren’t able to renew with their current lender and had to go with another lender under a brand new mortgage application.
The message to clients is simple – mortgage financing will now require regular reviews by your mortgage professional similar to an investment portfolio review. We recommend a minimum annual review of your current borrowing to ensure you are optimizing all your options but more importantly have a long-term customized plan in place given the ongoing changes we’re seeing now and will continue to see.
Give us a call to setup your complimentary portfolio review to ensure you’re one step ahead of the game.