Housing affordability has become a significant issue among Canadians and is now at its worst level in 41 years. To alleviate the financial burdens among homeowners and would-be homebuyers, the government of Canada recently announced a new Canadian Mortgage Charter for lenders to follow.
Let’s take a closer look at this new charter, its rules, and how it may help curb the housing affordability issue plaguing Canadians.
What Does The New Canadian Mortgage Charter Mean For Homeowners?
The new Canadian Mortgage Charter is a document that contains specific guidelines on how financial institutions are required to treat “vulnerable borrowers” who are struggling financially.
Note: The charter does not currently define what a “vulnerable borrower” is.
The guidelines are as follows:
- Allow temporary amortization period extensions for at-risk mortgage holders.
- Waive fees that would have otherwise been charged for relief measures.
- Not require insured mortgage holders to re-qualify for a home loan under the mortgage stress test when renewing their mortgage with a new lender.
- Contact homeowners four to six months before mortgage renewal to discuss renewal options.
- Waive interest charges on unpaid interest when mortgage relief measures result in mortgage payments that don’t cover the full interest portion.
- Homeowners at risk will have the option to sell their principal residence or make lump sum payments with no prepayment penalties to avoid negative amortization.
Temporary Amortization Period Extensions
Mortgage holders at risk of defaulting on their home loans may have their amortization periods extended as a way to reduce monthly payment amounts and avoid default. Lenders can review a borrower’s mortgage contract and financial profile and devise a customized plan to temporarily extend the amortization period. This extension will depend on the lender and their available renewal options.
Fee Waivers For Early Repayment
Some mortgage holders may need to sell their homes if they’re unable to keep up with mortgage payments to avoid default or foreclosure. Breaking a mortgage early typically comes with prepayment penalty fees, which can run in the thousands of dollars. Under the new Canadian Mortgage Charter, at-risk homeowners will not be charged this penalty for paying off part or all of their mortgage early.
This also applies to homeowners at risk of mortgage default if they choose to pay a larger amount (over their current prepayment privileges) toward their mortgage to avoid negative amortization.
No Re-Qualification When Switching Lenders
At the time of mortgage renewal, mortgage holders have the option to switch lenders. However, this typically comes with the need to re-qualify for a mortgage at the qualifying rate and undergo a stress test. Under the new charter, insured mortgage holders can re-qualify at their contract rate when switching to a different lender rather than having to qualify for the higher mortgage stress test rate.
This allows homeowners to shop around with other lenders for a better rate without being required to undergo a difficult stress test. Plus, their current lender may be more encouraged to offer a lower rate to keep the homeowner on as a client.
Notify Homeowners Of Renewal Options
The mortgage renewal period starts four months before the mortgage expiry date. But lenders can extend that window to six months. This is to provide ample time to inform homeowners of the options available for renewal and how a higher mortgage interest rate may impact mortgage payments. This rule already exists but has been included in the charter for easy reference for borrowers.
Waive Interest On Interest
A mortgage that’s in arrears means the principal and interest won’t be paid on time according to the payment schedule. Not only does the unpaid interest continue to accrue, but interest will be charged on the unpaid interest. The new charter gives lenders the option not to charge this extra interest.
Are Any Of The New Rules New?
Most of the measures under the charter already exist, with the exception of two:
- Lenders are required to contact homeowners four to six months before mortgage renewals are up.
- Lenders are required to allow insured mortgage holders to forego the mortgage stress test when switching lenders at the time of renewal.
Updating the mortgage charter as the economy and mortgage landscape change will help protect vulnerable borrowers.
Final Thoughts
The housing affordability issue in Canada is getting worse, prompting measures to be taken to ease the burden on Canadians who are either looking to buy or are already homeowners approaching mortgage renewal. The government of Canada has taken some steps, including implementing the new mortgage charter for lenders to follow that will hopefully give borrowers and mortgage holders some relief.
