As interest rates spike ever higher, qualifying for a mortgage is tougher than it has been in years. With both fixed and variable mortgage rate offerings roughly 3% higher than they were at the start of the year -- meaning most new borrowers are being stress tested in the 6 - 7% range -- it’s no surprise that home sales have fallen through the floor, along with mortgage deal volume.
According to data from Equifax, the number of new mortgages declined by 16.4% in the second quarter of this year compared to last, as borrowers shy away from today’s steep borrowing environment.
However, the Canadian mortgage industry is a resilient one -- and lenders, brokerages and insurers alike are getting creative to bring new borrowers in, or alleviate payment pain for existing clients.
Jerome Trail, mortgage broker at The Mortgage Trail, tells STOREYS he sees files every day that require an “unorthodox” approach. He works closely with both A- and B-side lenders to provide clients with an institutional option whenever possible to keep their rate lower and “avoid a hardcore alternative solution.”
“It’s a sign of the times,” he says. “We’re trying to do what we can to preserve a 2 or a 3% interest rate as opposed to moving people to the 5 and 6% range.”
According to his estimates, 20 - 40% of clients approaching his brokerage now require this kind of fix, while a number of new trends have become apparent since the Bank of Canada kicked off its hiking cycle in March.
Second mortgages are one such solution, he says -- and he is seeing an influx of them. But most of the fixes are coming from the lender side, such as B-side lenders extending mortgage amortizations.
“We have several lenders now using a 35-year amortization. It’s not just one, or [happening] occasionally -- it’s a lot,” he says. They’re offering the 35-year am, and thank god they are because if you’re putting people into a six or seven-year interest rate, the 35-year am, well, it makes things work.”
Extending the length of the mortgage is also a solution being examined by Canada’s default insurers; Sagen (formerly Genworth) announced last week in a lender update that it now encourages lenders to provide this solution for their clients “proactively", without explicit permission needed from the insurer.
Clients experiencing payment shock as a result of rising rates, and who are seeing their Gross Debt Service Ratios (GDSR) extend past 39%, can have their amortizations extended to bring that ratio back into range.
The extension can only be long enough to reduce the borrowers’ debt ratio back down to 39%, and must follow a “reasonable assessment” of their income to determine financial hardship as a result of payment shock due to rising interest rates.
“With the rising interest rate environment, Sagen recognizes that certain homeowners may face financial hardship related to a material increase in mortgage payments,” the default insurer writes. “This guidance provides clarity on the use of extended amortization as a workout option for homeowners faced with this hardship due to mortgage payment shock resulting from rising interest rates either at term renewal or during the mortgage term.”
The insurer encourages lenders to “proactively reach out to homeowners in advance of mortgage renewal” to discuss the option of extending their amortization in order to provide “immediate relief to homeowners by reducing the mortgage payments and improving overall affordability.”
Other consumer lenders are also reportedly getting creative to help variable borrowers who are seeing their payments soar. Rather than allowing their clients to hit their trigger rate -- the point where their fixed monthly payment only covers their mortgage’s interest and no longer contributes to their principal -- some banks are allowing those borrowers to instead move a portion of their interest costs over to their overall principal balance.
As per reporting in the Globe and Mail, TD Bank and CIBC are providing variable-rate clients with this option, while Royal Bank and Scotiabank do not allow the original loan amount to grow. It remains unclear at this time whether BMO provides the option.
But, as Trail points out, most of the action is happening on the B-lender side. The segment has boomed in the past year, he says, as many lenders get into the game with their own in-house divisions.
“Almost every lender has a B division,” says Trail. “Even the credit unions have B divisions; First National has a B division, Merix has a B division, MCAP has a B division -- all the everyday discount lenders that you’d want to go to, they’ve all now got these alternative lending divisions, so it’s actually gotten pretty competitive. And if you’re in the actual GTA, it’s uncommon for us not to find an 80% loan to value solution.”
However, he adds, the largest emerging trend he’s seeing in this rate environment is simply a decline in borrowers, with some ghosting after having an initial conversation about their unconventional options.
“As things continue to go up, it creates panic and uncertainty. And obviously it impacts qualifying,” Trail says, adding his brokerage’s database of people “sitting on the sidelines” continues to grow.
“We have the conversation with people and say, ‘Look, I’m not able to move your file to TD or Scotia -- somewhere where they’d recognize the name. However, we’ve got a pretty good alternative solution, the rate’s a tiny bit higher, we’re going to use a 35-year am…’ It basically scares people. It’s moving them to inactivity, and that’s really how they are speaking to us. So it comes full circle. We’re talking to buyers every single day, they’re just remaining on the sidelines because they’re afraid.”