'More panic than worry': How the mortgage charter may help with renewals
Charlottetown mortgage broker Steve Swyer is getting a lot of calls these days from clients wondering how they are going to manage their mortgage renewals.
Many of them don't understand the magnitude of what they may be facing, Swyer told CBC News: Compass host Louise Martin. They come in with an expectation of paying $50 or $100 more a month.
"When you hit them with a $250 or $400 increase, it's definitely a deer in a headlight kind of look at you. And saying, are you serious? Are you kidding me?" he said.
"More panic than worry. I've had a couple of clients already that are actually putting their house on the market for sale."
People should look closely at amortization during mortgage renewal, says mortgage broker Steven Swyer. (Steve Bruce/CBC)
That $250 to $400 range is probably about the average for the extra payment an Island family might be looking at, said Swyer. It is what, for example, you might see on a $200,000 mortgage taken out five years ago.
For a more recently purchased home with the Island's rapidly increasing housing prices, those costs could easily jump up $700 or $800 a month on renewal.
What's in the charter
Last week, as part of the federal government's fall economic statement, Finance Minister Chrystia Freeland issued a Canadian Mortgage Charter, meant to assist people facing renewal at higher interest rates.
Under the charter, banks are expected to:
Allow temporary extensions on the amortization period for mortgage holders.
Waive fees and costs that would have otherwise been charged for mortgage relief measures.
Exempt insured mortgage holders from re-qualifying under the stress test when switching lenders at the time of a mortgage renewal.
Require banks to reach out to homeowners four to six months in advance of their mortgage renewal to inform them of affordability options.
Allow borrowers to make lump sum payments to avoid negative amortization or sell their principal residence without incurring prepayment penalties.
Waive interest on interest when mortgage relief measures result in mortgage payments that fail to cover interest payments on a loan.
It is important to note these are only expectations. They are not laws or regulations.
"There's no mandate saying they have to follow the rules," said Swyer.
"However, it is in the bank's best interest to help people and assist people because the last thing that they want to do is to take somebody's home away from them."
The charter is, at least, a guideline for what customers should expect, and the removal of the stress test, which was a federal requirement to begin with, could make it easier to change banks if you are unhappy with the one you are dealing with.
Bringing monthly costs down
In terms of actual financial relief, waiving fees is an obvious benefit, but it is another part of the charter that caught Swyer's attention.
"The one that really piques my interest, and I think is going to be a really big help, is extending amortizations," he said.
On the higher end of mortgages, extending amortization could save hundreds of dollars a month.
Consider, for example, a $400,000 mortgage at 2.5 per cent on a five-year term in 2019 that needs to be renewed.
At the time, your payments would have been $1,792 per month, and at the end of the term you would owe $338,500.
At a renewal rate of 6.5 per cent, you are now looking at a monthly payment of $2,507. Extending that amortization can make a big difference. Adding five years brings the payment down to $2,267.
On the down side, you will be paying much more in interest costs over the full life of the mortgage.
Another important aspect of the charter is the expectation that your bank will contact you four to six months in advance.
You might not want to wait for that.
Talking to a broker or your bank early can help you prepare for what's coming and may open up options, such as pre-paying to lower the amount remaining on your principal, or rolling other debt into your mortgage at its lower interest rate.
