The Good News is You Can Do Something About It—But Canadian Banks are Hoping You Won’t!
New actions recently taken on behalf of the Canadian government and banks across the country are set to make your mortgage renewal even more expensive than you might have anticipated.
Banks have been steadily increasing their posted fixed mortgage rates, as much as double compared to the increase in the bond yields that drive the mortgage funding costs in the first place.
Their reasoning is simply that funding mortgages costs more than it did. Even if that were the case, that still begs the question—why such a huge jump in rates?
The Real Reason Behind Higher Mortgage Renewal Rates
Currently, like many Canadians, you probably qualify for your mortgage based on the 5 year posted rate. When banks increase those rates, the amount of mortgage you qualify for will be less. This means fewer people will qualify for the mortgage they currently hold.
The effect continues to snowball. Nearly half of Canadian mortgage renewals are maturing in 2018. Additionally, for nearly a third of Canadians, changing lenders at maturity is going to be much more difficult.
Banks are soaking Up the Profits
When they increase the posted rates, banks can raise penalties on customers who discharge their mortgage before maturity. This is known as the IRD or Interest Rate Differential.
This penalty fee creates attractive profits for the bank, so it’s in their best interest to slap customers with added charges if they suddenly can’t (or won’t) pay the new posted rate.
Market Sensitivities Mean a Delicate Balancing Act for the Banks and the Government
Overall, Canada’s economic growth has been solid. Oil and manufacturing have led the way and unemployment is at its lowest level in 40 years. With these strong economic indicators, the Bank of Canada may increase the overnight rate at least one more time this year.
Of course, the Bank of Canada understands the ripple effect this will have on borrowers. Already, the interest paid on Canadian debts has increased by over 9% in the last three months of 2017.
Meanwhile, debt payments represent nearly 15% of disposable income, while credit card delinquencies for both Visa and MasterCard have reached their highest rate since the 2008 recession.
This means the Bank of Canada has to perform a very delicate balancing act between economic growth, inflation, a bustling housing market, and rising debt. So far, so good—but this upward growth trend won’t last forever.
Banks Toughen Underwriting Requirements, Raise Rates Amid Zero Competition from Mortgage Finance Companies
Banks have seen the writing on the wall. They have started tightening capital and trying every trick in the book to make it cumbersome and difficult to tap into your home’s equity.
Back in 2016, the Canada Mortgage and Housing Corporation (CMHC) stepped away from insuring low-risk mortgages for people who had more than 20% equity in their homes. This eliminated any competition the banks would have ordinarily faced from the mortgage finance companies in what was normally a very lucrative market.
In the months that followed, banks realized they no longer had to compete. They began steadily and systematically boosting mortgage rates and employing tougher, more rigorous underwriting requirements.
This fulfills the double-pronged approach of making it difficult to access the equity in your home, no matter how much of it you may have built up over time, or what you plan on doing with it.
When the banks realized that they no longer had to compete on loan amounts or rates in order to keep their clients, their customers discovered that they now have to pay higher rates on things like home equity loans and second mortgages.
What is the Government Doing About All of This?
The government loves the notion of affordable housing for everyone. With housing prices increasing in metropolitan areas like Toronto and Vancouver, among other cities, the lure of low interest rates has attracted not only Canadian buyers, but foreign investors as well.
The government knows that this sudden surge in buying up housing means larger tax revenues, so they won’t hesitate to admonish pricier municipalities to put changes in place to make homeownership more attainable for the masses. This uptick in real estate profits is great for the economy, but it also creates a greater reliance on consumer debt.
One would hope that the government has a plan in place when all that debt becomes too large, but that remains to be seen.
How to Tap Into Your Home’s Equity—Quickly and Easily
The last thing you want to do when your mortgage renewal comes up is wait for this real estate bubble to burst. What you need is an unbiased, clear, and transparent assessment of your options. You may even be looking at a home equity loan but want to be sure of the numbers before you jump in.
With this in mind, we built the technology behind cannect.ca so you get a fast, online, unbiased quote, with instant approval in just 3 steps. Using our proprietary technology, we can pinpoint the value of your home and the amount of equity you currently have, so that you can tap into that equity without facing the strangleholds and delays from the bank.
As a lending alternative to banks, we work to guarantee your best mortgage renewal rate with flexible terms that suit your needs, regardless of your credit or income. With our automated, user-friendly technology, we’re also able to crunch the numbers and approve you instantly, online—all with no surprises and no hidden fees.
It takes just three steps to check your rate, and there’s no commitment or obligation. Try it now.