It’s no secret that higher mortgage rates are here. Variable mortgage rates have hit 4% in some cases. Meanwhile, some fixed rates are in the 5% range. The good news is that the mortgage industry is one that’s resilient. Brokers and lenders are always working on ways to service clients in any economic climate. This one is no different. Here are some of the ways both brokers and lenders are doing it in the current higher interest rate environment.
The Effects of the Mortgage Stress Test
It’s no secret that it’s tougher to qualify for a mortgage these days. With some variable mortgage rates in the 4% range, borrowers are forced to qualify at a rate in the 6% range. With some fixed rate mortgages in the 5% range, borrowers are forced to qualify at a rate in the 7% range. This means a borrower could see 10% or more chopped off their purchasing power compared to just a few months ago. This is all due to the mortgage stress test, which forces borrowers to qualify at the greater of the mortgage stress test rate, currently at 5.25% or the mortgage rate plus 2%. Previously variable rate mortgages only had to qualify at 5.25%. However, with the 1% rate increase in July, for the first time ever variable rate mortgages now need to qualify at a rate higher than the benchmark.
Will Longer Amortization Periods Make a Return?
Lenders are resilient though. Lenders are coming up with new ways and programs to help keep the dream of homeownership alive. One of those is by extending the amortization period. Right now, if you’re putting down at least 20% on a property, your maximum mortgage amortization period is generally 30 years. However, if higher mortgage rates persist, we may see the return of longer amortization periods. We could see 35 and 40 year amortization periods make a return to the mainstream. A longer amortization does end up costing the borrower more interest in the long run, but the lower payments do make it a lot easier to qualify. The government has spoke about extending the amortization period on insured mortgages (those putting down less than 20%). Could we see the return of 30-year insured mortgages? Only time will tell.
Mortgage Lenders Continue to Innovate
Then there are the mortgage lenders themselves. The mortgage industry is an industry that is always changing. One that never stands still. Mortgage lenders are always looking to innovate and come up with new products. And now is no exception. Previously, borrowers might not have paid much attention to credit unions. However, going forward credit unions should make up a much bigger piece of the mortgage pie. Provincially regulated credit unions aren’t required to stress test borrowers. As such, some credit unions are offered mortgages where all the borrower needs to qualify on is the mortgage rate, not the stress test rate or the mortgage rate plus 2%. This means that a borrower’s purchasing power could be 15 or 20% higher with a credit union versus a bank.
Then there are unique products out there like the Manulife One where the attached HELOC automatically pays the mortgage, so you have less to worry about if you run into cash flow issues I would expect more unique products like this to come out in the coming months and years. You want to work with a mortgage broker who stays up to speed on all of this. That way you’ll be the first to hear about unique new programs like this.