When Erin and Joe decided to sell the large suburban house where they’d raised two sons, they assumed they’d have no trouble arranging financing for the new townhouse they were downsizing to.
After all, they would be able to put about 45 per cent down on their new $435,000 townhouse, and they were keeping the same $250,000 mortgage amount they had on the old place. Plus they had a long relationship with their bank and a decades-long history of making payments on time.
They were in for two unpleasant surprises.
Turns out the mortgage they believed was “portable” to a new house was not; and because Joe had recently retired from his job as an inspector at a casino and Erin was a self-employed small business owner, they no longer qualified for financing under the mortgage stress test for federally regulated financial institutions.
Wes Sudsbury, president of the Canadian Mortgage Brokers Association and a broker with Homeguard Funding Ltd. in Newmarket, says many newly retired people – and other current homeowners – are shocked to learn they no longer qualify for a mortgage.
“Everybody was taken off guard by the stress test. It really changed everything, whether you were a first-time buyer, buying a second home, downsizing or simply renewing a mortgage (with a new lender),” says Sudsbury. “The stress test makes it more difficult to qualify.”
Since Jan. 1, 2018, all home buyers seeking a new mortgage are subject to a stress test if they are dealing with federally regulated lenders such as a major bank, even if they have a down payment of 20 per cent or more. Borrowers now have to qualify for a mortgage at a rate that’s two per cent higher than the bank’s contracted rate, or at the Bank of Canada’s five-year benchmark rate — whatever is higher.
Many lenders that aren’t required to apply the stress test under federal rules, such as credit unions, are still complying with it, says Sudsbury.
Sudsbury says that many people are shocked to discover that the amount they can borrow decreases drastically when they retire — even if they have a lot of assets — because the stress test looks at your income, which often goes down in retirement. Some find they can only borrow $100,000 or less, he says, which is a problem if you live in a big city where prices are high.
Not just retirees may have trouble qualifying, he says. He recently had a client who bought a $750,000 home with $500,000 down. She owned an existing mortgage-free home that she was fixing up that she hadn’t sold yet.
“She had very little income and even with all that equity, she didn’t qualify for a mortgage (with a bank),” Sudsbury says. “If she sells all her property and rents a place to live, she will be paying more in rent than she would for mortgage, taxes and utilities in the home she bought.”
He was able to find a private mortgage for that client, at a slightly higher interest rate.
He has another client going through a marital separation with the same issue. He only qualified for a mortgage that wasn’t adequate to buy the house he wanted; if he rented the same home, he’d be paying substantially more than he would to own it. The client was able to buy the house after securing a co-signer who assisted him with qualifying for a mortgage.
The mortgage on Erin and Joe’s old house had been described as portable when they originally arranged it and they believed they could simply transfer it to a new house.
However, they learned that “portable” in this case means the bank will keep the same interest rate as their existing mortgage for the remainder of the term and they wouldn’t pay a penalty for renewing early.
However, it would be a brand-new mortgage and they’d have to qualify. And because the closing date of the house they sold and the closing date of their new home was more than 90 days apart, the “portable” clause didn’t apply.
They consulted with a mortgage broker who tried several financing sources before finding them a mortgage with a lender that deals with small businesses. Their two-year mortgage rate is at 4.69 per cent (according to Ratehub, current two-year rates with more mainstream lenders range from 1.99 to 2.89 per cent). They also had to pay upfront fees of approximately $5,000 and pay off their car lease in full even though it wasn’t due for another year.
“The fact that I’ve been making mortgage payments for close to 50 years and never missed a payment didn’t seem to matter,” says Joe.
Sudsbury’s advice for people nearing retirement age who want to renew a mortgage, refinance their existing home or move to a new one, is to make an appointment with a mortgage expert. Ideally, you should start planning several years in advance of retirement.
“There are a few avenues that you can explore,” says Sudsbury. “If you’ll have a reduced income, get qualified for a mortgage before you retire.”
If it’s too late for that, there are still a couple of possible routes to go.
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“You could take a part-time job, but that income may not be guaranteed and a lender will want to see a two-year history of that income,” says Sudsbury. “Or a lot of parents have supported their kids for most of their lives and perhaps they could ask their adult kids to co-sign a loan for them.”
What retirees shouldn’t do, he says, is cash in their RRSPs to buy a house or deplete their savings.
“If you had to take $200,000 out of your RRSP, you are paying taxes on it and you may be draining your life savings,” he says.