Given the sea change in mortgage regulation over the last few years, oversight was inevitable.
However, one that carries weighty ramifications for borrowers is that they will not be able to qualify for insurable mortgage rates anymore if they have refinanced with their institution, leaving them with the option of remaining with that institution or moving onto a better lender with no rate advantage.
“If somebody refinances before November 30, 2016 and they come up for renewal, no problem, they can still qualify for insurable mortgage rates, saving them money, but if they refinance after that date then they don’t qualify for those rates when they come up for renewal,” said Doug Adlam, a mortgage broker and principal at Guelph-based Champion Mortgage.
Once refinanced, borrowers will never again qualify for insurable mortgages until their property is sold or the mortgage is collapsed. Ostensibly, the intent was to protect CMHC and taxpayers by only taking on lower risk insured mortgages—renewals and purchases—but because refinance money is usually allocated towards paying bad debt, like credit cards, there’s been a crackdown.
“I don’t think it was intentional, but I think the decision makers at the Department of Finance missed the boat on this because the purpose was to remove higher risk loans from the CMHC portfolio by only allowing purchases and renewals to be insured—and I get that—but why on Earth would you handcuff someone like that?”
Around the time of the rule change, a lot of banks were offering great deals on one and two-year rate specials, but those are starting to come up for renewal. Adlam disputes the notion that borrowers refinance mortgages because they’re fiscally irresponsible.
“If someone refinances to go through a separation—we see them all the time—they refinance to pay off their spouse, but then they get to renewal five years from now and they don’t qualify for insurable mortgage rates, which are, in general, a quarter to half a percent lower,” said Adlam. “I don’t think the Department of Finance really looked at the long-term implications of their rule change in deeming that refinances are not insurable, and that any future renewal of that previously refinanced mortgage is also not insurable. That’s a big, big fact that they had not mentioned when they released the new rules and, of course, it didn’t come up until people tried to renew their mortgage.”
Daniel Johanis, a broker with DLC Mortgage Centre, says he’s going to be having some difficult conversations in the not-too-distant future.
“It’s going to be tough for some clients who didn’t realize it at the time, but they kind of pooched themselves,” he said. “Especially when it comes to clients looking to capitalize on some of the lower rates out there, it will be a challenging conversation to have with some of my clients because they’ll ask why so-and-so is advertising this rate but they don’t qualify.”
However, Adlam believes the oversight can be rectified easily.
“If mortgage is refinanced and makes it to renewal in three years, they should be allowed to qualify for insurable again because they’re a low-risk borrower,” he said. “The other solution is to not blanket refinances as one whole thing, and to try to break it down. If they refinance to pay out debt, okay, fine, but a one size fits all approach is not fair to responsible borrowers.”