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decoding the mortgage market

Ottawa's new mortgage policies will soon tighten the leash on borrowing and the impact on home buyers is being hotly debated.

But existing home owners, particularly those with large amounts of debt, should also be paying close attention because the next time they go to change their mortgage, they could be in for a surprise.

If you have a mortgage and plan to refinance or renew, your experience will depend on two things: whether you plan to change your mortgage and how qualified you are.

Let's assume that you come up for renewal and are not looking to increase the risk of your mortgage. By "increase risk," I mean raise the mortgage amount, amortization, or loan-to-value (LTV) ratio.

In this case, if you're in good standing and happy with your lender, you can simply renew and call it a day. Most renewers do just that –78 per cent in fact, says Will Dunning, the chief economist with the Canadian Association of Accredited Mortgage Professionals.

Even if you want to switch lenders, you can still keep certain mortgage features. Most lenders, for example, will take in a regular mortgage as-is, even with a 35-year amortization. The key points here are that your mortgage cannot be tied to a line of credit and the risk cannot increase. When mortgage risk increases, that's when some people run into roadblocks.

Here are six such scenarios where switching or refinancing might be challenging in the new environment:

1) The Aborted Switch
The Scenario: You're up for renewal. You have a remaining amortization of more than 25 years and less than 20 per cent equity. You find a better deal at another lender but your housing expenses are more than 39 per cent of your gross income (39 per cent is the new "gross debt service" limit).

Implications: Goodbye better deal. Only your existing lender can re-lend without re-qualifying you. You'll be forced to renew with your current lender and take the rate and terms it gives you.

2) The HELOC Shuffle
The Scenario: You've got a home equity line of credit (HELOC) that lets you borrow 66 to 80 per cent of your home value. You want to: (a) change your HELOC to a new lender, (b) increase the borrowing limit, or (c) add a new mortgage portion to the HELOC.

Implications: Any such changes could cut back your 66 to 80 per cent LTV revolving credit line to the new maximum of 65 per cent. The Office of the Superintendent of Financial Institutions (OSFI) tells us: "Federally regulated financial institutions are expected to apply the 65 per cent HELOC limit to all new borrowers, irrespective of whether the borrower is purchasing a house (i.e., a new mortgage origination) or the borrower is switching." It remains to be seen if provincial regulators will enforce this federal guideline. If not, this might not apply to credit unions.

3) Refinance Blues
The Scenario: You've got high-interest debt or home improvement costs that you want to roll into your mortgage. The problem is, doing so would require an insured mortgage greater than 80 per cent of your property value – which is prohibited as of July 9.

Implications: You're stuck with: (a) a more costly cash-back mortgage up to 85 per cent of your property value, (b) an even costlier non-prime mortgage up to 85 per cent of your property value, or (c) a second mortgage from an alternative lender. In most cases, you'll pay more than you do today to refinance to 85 per cent LTV.

4) The Cancelled Approval
The Scenario: You've got an existing mortgage commitment but you haven't closed yet. You've been approved for a 30-year amortization with good credit but less than 20 per cent down. Before closing, the unexpected happens: your builder extends your closing date beyond your approval time frame, your income drops or you incur more debt.

Implications: Your lender may re-qualify you using the new rules. You could be forced to take a 25-year amortization and meet the stricter gross debt service (GDS) test of 39 per cent. If you're pushing the limits, this could put your debt ratios above guidelines and void your current approval.

5) Stuck With a 5-Year Fixed
The Scenario: You're up for renewal and you have 20 per cent or more equity. You want a variable rate or a 1– to 4-year fixed term. The problem is, your income drops and/or you've taken on some debt. Now you're no longer able to afford payments at a 5-year posted rate.

(The 5-year posted rate is becoming the mandatory "qualification rate" for all uninsured borrowers with a variable rate or 1– to 4-year fixed term. Even if your actual rate is 2.00 per cent, you'll have to prove your ability to pay the posted rate, which is 5.24 per cent as of today.)

Implications: You could be forced into a 5-year fixed because it's the only term you qualify for. Reason being, the government allows lenders to "test" a borrower's payment ability at his/her actual rate if the term is fixed at five years or more. Note: As with new HELOC rules, it's not confirmed that provincial regulators will enforce this federal guideline.

6) The Home Upgrade
The Scenario: You've already got a mortgage, but you want to increase it to purchase a new home. You have less than 20 per cent equity.

Implications: You will need to meet the new stricter rules on your entire mortgage, even on your existing portion. That means your amortization will be capped at 25 years, your housing expenses will need to be under 39 per cent of gross income, and your purchase price will need to be under $1-million.

You'll notice that in most of these scenarios, marginal borrowers are being restricted. From a risk standpoint, that is a good thing.

In a few cases, like with the HELOC and long-term amortization scenarios, borrowers who wish to keep their old flexible terms will be handcuffed to their existing lenders. Lenders know they can't leave and may use that as leverage to charge higher rates.

Robert McLister is the editor of and a mortgage planner at Mortgage Architects. You can also follow him on twitter at @CdnMortgageNews.

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