Here are some of my thoughts on what may be coming, within the context of the changing economic landscape. Of course, we really don’t know for sure what will happen, but let’s look at what we can take into consideration to be better prepared.
Have we seen the true effect yet of loss of income? CERB benefits are on the cusp of running out for many folks (there is extension, but stricter, so some folks will not qualify). The majority of lenders already did not consider CERB personal income to qualify, however, this may be bigger effect on rental property financing. Specifically, lenders may not be necessarily comfortable with signed active leases. How do we know rents will roll in post CERB and higher unemployment? (This is a major question already being asked by commercial lenders). It is prudent to prepare for additional request for documentation, such as historical proof of rental deposits. Keep your deposits consistent and easy to verify against lease rent amounts for your portfolio rental property. For subject rental property, lenders may choose to apply a more conservative rental income than before.
Many Canadians opted for deferring their mortgage payments. Similarly, many also chose to defer property taxes. Technically, the date for re-activation and ‘paying back’ what was on hold is approaching soon. Some borrowers may have difficulty doing this, we will have to wait and see how the lenders and insurers will respond. I don’t think the collective intention is to force borrowers into default. The lenders are not in the business of holding large amounts of real estate. So, there may be tailored repayment solutions offered to keep the market stable. Historically, Canadian’s mortgage default rate is very low. Some models show even with high unemployment rate, default rate would still be low (source, Canada Banker’s Association).
Additionally, as deferrals have now had a few months to be ingested into the system, we may see some effects on mortgage renewals, refinances and applications. Although it was promised taking on a deferral was not going to affect your credit history, I have heard some cases (rare at this point in time, but still unsettling to hear), where the lender does take it into consideration the fact that a deferral request was made. It leads to more questions on income stability, even if you are now back to paying the mortgage.
We may see more horror stories about high mortgage penalties. Some borrowers inevitably will be forced to exit their mortgage due to economic consequences (like need to sell property or refinance). I previously discussed that not all lenders calculate their penalties the same way. Retail banks, for example, are notorious for bloating up their calculations. Without getting too geeky math on you, basically, because the current ‘posted’ rates are now most likely lower than when the borrower closed on the mortgage they now need to exit, means mathematically the ‘loss spread’ is higher, in particular for lenders that use a ‘discount off posted rate’ factor in their calculation.
This is why using a mortgage broker is so important when evaluating your mortgage options. There are lenders that are more ‘penalty friendly’, and at a minimum, upon a comprehensive mortgage review, if a retail lender is deemed to be the best mortgage solution for you, the penalty risk can properly explained and evaluated, and an appropriate term length and product can be selected. I am certain, that any news article you will see about a mortgage penalty horror, will paint the borrower saying ‘I didn’t know, nobody told me at the bank’.
Lenders may continue to rein in on refinances. CMHC, for example, continues to express sentiment on declining property values and increasing borrower debt. Within the commercial lending world, CMHC dropped a bombshell earlier this summer, putting significant restrictions on refinancing (CMHC insured) multi-unit property (5+ units). Lenders may reflect that general sentiment back by tightening up refinances. For example, loan to value or equity take out amount may be scaled back. I suggest that if you are considering a refinance, start the conversation now, so you can evaluate your position within this new context.