Some money-saving updates to Canada’s mortgage rules could save you some loot if you’re renewing a mortgage.
Here’s what changed.
In October of 2016, the government banned refinances from being default insured. But regulators allowed lenders to keep insuring transfers. A “transfer” is when you switch lenders to get a better deal, but don’t increase your mortgage risk − as opposed to a “refinance,”in which you may increase your mortgage amount and/or amortization.
Ever since, lenders have not been able to insure mortgages that were previously refinanced. That means you couldn’t get insured mortgage rates, which are often at least 20 basis points (bps) better than uninsured rates.
But now you can.
On April 30, all three of Canada’s default insurers officially announced an end to this costly prohibition. Canada Guaranty, for example, stated:
“After additional consultation with the Department of Finance and the other mortgage default insurers, we have received clarification that if a prior uninsured loan has already been advanced with an Approved Lender, that loan may be switched to another Approved Lender and insured, regardless of the loan originally being a refinance, purchase or having an amortization greater than 25 years.”
Canada Guaranty explains that this is possible “provided the amount of the outstanding balance is not increased at the time of transfer and the amortization period does not exceed the lesser of the remaining amortization or 25 years.”
Long story short, if you refinanced your mortgage and now want to switch lenders to get a better deal, you get access to Canada’s very best rates (which are insured rates). On the average existing $200,000 mortgage, 20 bps of rate savings keeps almost $1,900 in your pocket over five years.
Here are seven more tips if you’re thinking about switching lenders:
1. If your mortgage is already default insured at the time you change lenders, you’ll get the lowest rates of all.
2. A bunch of lenders now let you switch a mortgage and secured line of credit (a.k.a. a “collateral charge”) to a new lender and get the best insurable rates. This wasn’t common until recently. You’ll often have to pay about $1,200 in legal, appraisal and discharge fees to do this, but if you can save more than that in interest, you’re still ahead.
3. If you have a regular mortgage (a.k.a. a “standard charge”) and switch lenders, your new lender will usually pick up the legal and appraisal fee if you go for a three-year term or longer. But you’ll still be on the hook for your old lender’s “assignment” fee (about $250 or more in most provinces).
4. Here’s a simple mortgage rate comparison calculator to see if switching lenders will save you more than your closing costs.
5. Some lenders let you roll up to $3,000 of closing costs into the new mortgage, even if you don’t refinance. That way, you don’t have to be out of pocket for things such as appraisal fees, discharge fees and mortgage penalties.
6. If you switch lenders with an insured mortgage that you got before Oct. 17, 2017, “the mortgage rate stress test requirement does not apply,” CMHC says. In other words, some lenders will only make you prove you can afford payments based on their discounted five-year fixed rate (e.g., 3.49 per cent) instead of the Bank of Canada’s posted five-year fixed rate (e.g., 5.34 per cent). Mortgage brokers know who these lenders are.
7. $1-million-plus properties usually cannot be default insured. But if you switch a mortgage on a home that was worth less than $1-million, and insured, and the property value subsequently rose to more than $1-million, you may still be able to get insured rates.
These “escape clauses” will result in big banks losing more insurable customers at renewal. As we speak, non-bank lenders are widely reporting spikes in transfer (“switch”) mortgage applications.
On the other hand, banks are retaining more uninsured mortgagors. I’m talking about higher-leveraged borrowers who are trapped because they can’t pass the Office of the Superintendent of Financial Institutions’ new uninsured mortgage stress test. That rule could keep about one in 10 borrowers at the mercy of their bank because they can no longer switch lenders to save money. This is possibly the most short-sighted mortgage regulation of all time, but let’s save that for a future column.
In the meantime, if your mortgage is coming up for renewal and you are well qualified, these tips may score you a better deal. Happy switching…