According to the Bank of Canada, about half of homeowners who took out mortgages before interest rates started rising in February 2022 have yet to renew their mortgages.
By the end of 2026, nearly everyone in this group — more than 2 million homeowners — will be renewing their mortgages, according to estimates by the Canada Mortgage and Housing Corporation.
In addition to facing rising interest rates, some borrowers may find themselves in a different financial situation than they were a few years ago.
Changes in household income, debt levels and credit scores can make renewals complicated. Even if your situation leaves you with fewer options than you'd like, proactively seeking expert advice and preparing properly can put you closer to the best outcome.
Change #1: My income has changed
“The impact of rising interest rates on borrowers' ability to make mortgage payments will depend primarily on their future income,” according to a 2023 Bank of Canada report. “Without income growth, the average borrower could have to spend up to 4% of their pre-tax income on mortgage payments by the end of 2027.”
But if your income is reduced, the burden becomes even greater.
“My first reaction is, 'Everyone is different, so let's take a moment to slow down and look at your specific situation,'” says Naomi Hamm, a mortgage broker with Centum Mortgage Choice in Brandon, Manitoba.
For example, Ham says housing prices in her area aren't as high as in Vancouver or Toronto. The mortgages she sees are typically for $200,000 or $300,000. Interest rates are still a few percentage points higher than they will be in 2022, but “the payments aren't as scary as I thought they would be,” she says.
For those renewing their mortgage, comparing offers from multiple lenders is the best way to ensure you get the best rate, though depending on how much your income has fallen, you may have fewer options to consider.
Before you can switch to a new lender, you'll have to get requalified, which means you'll have to pass a mortgage stress test that compares your income to your debts.
If your debt-to-income ratio has dropped significantly, you may have an alternative: As long as you haven't missed any mortgage payments, you can expect to get a renewal offer from your existing lender and won't have to get requalified.
Finally, your income may be going in the opposite direction: Younger workers, for example, tend to see faster wage growth than others, according to the Bank of Canada. They may be in a better position to requalify elsewhere.
Whatever your situation, working with a broker may help you find a creative solution. For one thing, if you expect the reduction in income to be temporary (such as while you complete a degree or take time off to care for a family member), it may make sense to choose a shorter term with the hope that better terms will apply in a few years.
Change #2: My source of income has changed
If you're willing to shop around for the best rate, moving from a salaried position to a comparable position shouldn't be a problem.
However, if you go from being salaried to being self-employed, you'll need to establish a track record: In most cases, lenders will want a two-year record showing stable income.
If you're new to freelancing, you can expect a renewal offer from your current lender, but your options may be limited when looking for a better interest rate. If you think you might transition to self-employment in the future, think about when your next renewal is due before you make the switch.
Some of you may have retired and switched your income to retirement income. Lenders will want to see the balance of any pension or retirement accounts you have. If you are planning to retire in the near future and renew your mortgage, it is advisable to consult a mortgage professional first to avoid any hassle.
Change #3: More debt
Taking on additional debt could hurt your chances of getting the best rate at renewal, but it's not necessarily a reason to walk away from a deal.
“It's possible to have a lot of debt if you have enough income to offset it,” Ham says.
What matters most is your track record. “Paying your bills on time is super important because that's a really hard thing to fix,” she says. “If you're constantly late on your credit card payments, the only thing that's going to fix that is time.”
Of course, higher mortgage payments, combined with other debts, put homeowners in a bind. Mortgage stress tests may feel like an obstacle, but their reason for existence becomes clear when: How well will a borrower be able to handle their total debt if interest rates rise? As more money is taken out of their bank accounts each month to pay debts, there is usually less money available to cover the increased interest.
Conclusion
There are many reasons why a homeowner's financial situation changes: retirement, starting a family, losing a job or changing jobs.
While changes in your financial situation can cause issues at renewal, there is always a best way to go about it. Reviewing all the options available to you is the first step to choosing the best one. Working with a mortgage broker is the most efficient way, and it usually doesn't cost you anything to help.
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