As existing mortgages come up for renewal in 2018, many Canadian homeowners have some hard decisions to make.
But while a mortgage renewal on a second property is not really materially different than renewing on a primary residence, there are some specific considerations mortgage brokers recommend taking into account.
The most important one, says Jeff Spencer, vice president of retail sales and distribution for Manulife Canada, is what a homeowner’s plan is for their second home. “If they’re renting them out or planning to renovate, or there’s something they’re looking at doing over the next few years with that property, they should definitely take that into account in the product they choose,” he says.
For homeowners who might want to renovate or do landscaping work to their cottage or second home but haven’t yet committed to a time frame, Mr. Spencer says, a Manulife One mortgage could be the best fit.
The solution combines all of your income, savings and debt, including mortgages, credit cards and lines of credit, into one account. Any income coming into the account then goes directly towards paying down debt. Because Manulife One calculates interest daily, homeowners stand to save thousands in interest payments, and customers are still able to withdraw from the account as needed for expenses.
“It gives [clients] some flexibility to do additional borrowing at any point in time,” Mr. Spencer says. So for people who decide to commit to adding a back deck to the cottage, “they can borrow some dollars a few months from now, or even a few years from now.”
Other considerations include thinking about any factors that may affect your ability to renew.
Joe Bladek, a Barrie-based independent mortgage broker, says if a homeowner has been renting out a second property during their existing term — especially if it is short-term rentals through Airbnb — they should be aware of the potential for their lender to do an in-person appraisal of the property.
“When you have a high turnover in tenants, that can cause a lot of damage to a home,” he says. “If the lender wants to do a full appraisal, they’ll be able to see how much that home’s condition has changed from when the mortgage was put on it, and that can impact a renewal.” Some lenders aren’t okay with Airbnb rentals, and might not renew if they learn a borrower has been renting out their cottage or second home that way instead of to a stable tenant.
“It’s common sense stuff, but it makes a difference”— Joe Bladek, Barrie-based independent mortgage broker
One challenge that everyone can expect to face is higher rates, and some Canadians may also face more stringent qualifying rules, says Mr. Bladek. Canada’s federal financial regulator imposed a new “stress test” at the beginning of the year on home buyers who don’t need mortgage insurance – those with down payments of 20 per cent or more.
The stress test requires these borrowers to prove that they could handle interest rates two per cent higher than the Bank of Canada’s five-year benchmark rate (currently 5.34 per cent), or two percentage points higher than their actual offered rate. A similar stress test already applies for those with down payments of less than 20 per cent, but those conditions are based only on the central bank’s rate.
According to a Bank of Canada analysis, around 10 per cent of Canadians who took out an uninsured mortgage between mid-2016 and mid-2017 wouldn’t have been able to meet the new standards.
“A big thing right now is the people that bought second properties a few years ago, some of them wouldn’t necessarily qualify for that same property if they went to buy today,” Mr. Bladek says. “Because of that they’re stuck with that lender and whatever rates they’re being offered, because they can’t qualify at any other financial institution.”
But, Mr. Bladek says, in those cases there are ways to improve your situation in advance of renewal, and potentially land a better rate. He recommends that people in that position check what their credit score is and start working to improve it. Homeowners should also be careful not to max out credit cards or miss any mortgage payments, especially as the renewal period approaches. “I’ve seen lenders say, ‘you’ve missed a payment in the last year, so we’ll offer you a higher rate,’” he says. He also recommends making sure the cottage or second home is in good repair.
“It’s common sense stuff, but it makes a difference,” Mr. Bladek says. He cited a recent client whose rate he was able to reduce by demonstrating to the lender that the client’s credit score had improved and their income had increased since the time they applied for the mortgage. “They weren’t able to qualify anywhere else. But after a simple back-and-forth with the lender they were able to get the rate lowered a bit.”
Above all, Mr. Spencer from Manulife Canada says, homeowners should make sure to invest some time in the process — even if they ultimately don’t need to make changes. According to an HSBC survey of 10,000 people across ten countries, Canadians are the least likely to shop around for a better mortgage rate, with only 50 per cent saying they’ve done so, in comparison to the global average of 61 per cent. Canadians, whether they’re renewing on their primary residence or a cottage, often “don’t do anything at the time of renewal,” Spencer says. “It’s incredible to think.”
“Everybody at renewal time should be having a few conversations with a mortgage broker or lending specialist to find out what some of their options are,” he says, “and actually taking the time to make sure the product they have and the way the product is constructed is well-suited for their overall financial objectives.”
Advertising feature produced by Globe Content Studio. The Globe’s editorial department was not involved.