Switch Without a Hitch: What You Need to Know When Renewing Your Mortgage
Switching your banking provider when renewing a mortgage can be complicated. You need to take into account all of the steps of acquiring a new mortgage (because you’re technically a new client). In some cases, this can include being rated against the federal government’s recently introduced mortgage stress test. For business owners in particular, switching can be made more difficult with the added challenge of having a potentially irregular income.
CWB understands the realities of hunting for a better mortgage rate, and the perceived hassle of switching providers. As a result, CWB is offering 2.99% on a five-year fixed term mortgage — a highly competitive rate in the current mortgage landscape. Our mortgage experts have broken down what you need to know about switching lenders and getting the most out of your mortgage when it comes time to renew.
A mortgage that stands the test of time (and money)
Using the new CWB five-year fixed mortgage as an example, though the rate being offered is 2.99% that may not be the rate that you will be tested against when qualifying. Federal government mortgage guidelines could potentially require you to be assessed on a higher interest rate than what’s being offered. This is to help ensure you can comfortably make your mortgage payments. If you have mortgage loan insurance through Canada Mortgage and Housing Corporation (CMHC), you will be tested with either the Bank of Canada’s conventional five-year benchmark mortgage rate or the rate provided by your lender — whichever one is higher. If you don’t have mortgage loan insurance, you will be tested with either the Bank of Canada’s conventional five-year benchmark mortgage rate or the rate provided by your lender plus 2% — again, whichever is higher.
“Even though you’re paying 2.99%, that’s not what we’re qualifying you on,”
says Donna Austin, AVP and Branch Manager of CWB’s Old Strathcona location in Edmonton, Alberta. Furthermore, she explains that business owners can face additional challenges with the stress test. “If business owners are taking a minimum income from the business to minimize their taxes and we’re qualifying them at a higher rate, that makes it even tougher.”
Tammy Madon, an Account Manager at the Edmonton Main CWB branch, points out that business owners who haven’t been in business for more than two years, or are just starting out, can find getting or switching a mortgage even more difficult. Mortgage guidelines require two years of income to qualify your financials and it’s those two years of incomes that’s the basis for the stress test. That being said, there are ways to navigate these obstacles with the guidance of a trusted advisor.
“If they’re self-employed, it’s a newer business or not established yet, we may ask for a larger down payment to lower the loan-to-value ratio,” says Tammy. “In some cases, we may ask for a guarantor or co-signor who has stable income from a different source.” These are some of the potential solutions that can be offered to business owners for overcoming challenges they can face when applying for a mortgage.
Know when to say ‘when’
Deciding when is the best time to switch to a better rate is another important factor to consider. On many fixed-term mortgages, the individual will have to pay a penalty when ending the term of their mortgage early. But these upfront fees may be worth it in the case of the money saved from a better rate outweighing the cost of the penalty.
“If it will cost me $3,000 to move my mortgage, but I will save $8,000, then it may be worth the move,” explains Donna. “As advisors, it’s up to us to inform our client if it’s not advantageous to move it at this point in time and to ensure they have the right products that fit their needs.”
Tammy echoes Donna in pointing out how working closely with a financial advisor will help make sure you make the best decisions for your mortgage and your life. In fact, she suggests that you should start working with banks as early as possible on the process to help you prepare for the move. This includes gathering all the documents you will need and coming up with the questions you need to consider.
A mortgage for some
Although the benefits of paying only 2.99% on a mortgage for a guaranteed five years seem obvious, a fixed-term mortgage may not be the best fit for everyone.
Business owners may find this mortgage’s benefits won’t meet their needs. The property has to be owner occupied for the duration of the term, so if the business owner is looking for a mortgage on a rental property or a flip house they’re looking to sell, there are better solutions. The lack of flexibility may also be a drawback for business owners depending if they need extra income to help their business.
“Business owners need to be able to move their money,” says Donna. “Lines of credit typically work better for business owners. But that doesn’t mean they can’t have a portion of it locked in at 2.99%, allowing some flexibility to pay it down.”
Painting your financial picture
Donna and Tammy highlight that it’s beneficial for you to have all of your banking, including mortgages, in one place. They point out that by building a relationship with your bank, advisors have a better understanding of your financial nuances and can more accurately see the big picture of your current situation.
“It’s much easier for us to qualify clients when everything is with us,” says Donna. “Most of the time, I’m putting pieces of a puzzle together. It’s much easier to put it together if I have access to all of the information in one place rather than assembling it together from many different places.”
From personal investments to any business banking you may have, having everything all in one place can help the bank find the best savings and efficiencies for you — your mortgage included. This is especially beneficial for business owners who can be better assessed for mortgages based on their entire banking history.
“We can see exactly what you have, your net worth and your habits of saving or investing,” says Tammy. “If you have all your banking with us, we call it full service banking and can help you make the most of your investments, including your home.”
If you’re gearing up to switch your mortgage or would like to explore your options, contact CWB today to discuss the best mortgage strategy for you.