A few weeks ago, the Canadian government SHOCKED the financial world by making it much more difficult to qualify for a mortgage.

You’ve probably heard about this already. If you’ve been living in Mongolia for the last few weeks and missed it, don.t fret. I wrote about it. Give that link a click, yo. Maybe give it a kiss too? NO TONGUE, PERVERT.

A lot of energy was spent talking about the new qualification rules, which are obviously a pretty big deal. I also talked about bulk default insurance, and how that could end up being a bigger deal that most realize.

Today, let’s spend some time talking about another potential downfall from the new rules, the ability to refinance a mortgage.

Refinance time

The process of refinancing a mortgage goes exactly like this. At least for 99.2% of us.

“Hey, I’ve been in this house for five years now. Guess it’s time to renew the ol’ mortgage.”

*takes sip of coffee*

*immediately spits out coffee in spectacularly hilarious way*

“4.5%? That’s (expletive deleted) (expletive deleted). Who the (expletive deleted) does this (expletive deleted) bank think they are, anyway? What a rip-off!

Sounds like this most people person has a bit of a potty mouth. 

Thanks, italics man.

Many banks send out pretty crummy offers to renew. That’s because something like 80% of customers won’t even bother to negotiate. They’ll take the five-year fixed option and move on. If you knew 80% of your customers wouldn’t bother to negotiate, you’d do the same thing.

Mortgage renewers have three choices. They can either suck it up and pay a higher rate, or they can phone into their lender and try to negotiate something better. This is usually pretty easy. Or they can give their bank the finger and head on over to a better lender. One that’s faster, stronger, and maybe even smells a little like lilacs.

There’s just one problem with taking your talents mortgage to South Beach another lender. You have to go through the qualification process again. You’re applying for a whole new mortgage.

You can probably see where I’m going with this. If the feds have made qualifying for a mortgage harder, they’ve just increased the leverage your existing lender has come renewal time. There are going to be plenty of people who are going to be effectively trapped in their current mortgage when the term comes up.

It’s not going to be impossible to refinance, especially for people like you. You’re here at the FU machine every day, so I know you’re responsible enough to buy intelligently. No overpriced Toronto houses for you. You went ahead and were smart and only bought something that was 3x your income instead of 6x. Options will still be available because you were smart about it.

But for regular people? Oh man. They’re going to be so screwed. Genworth, the privately-held version of CMHC, admitted that approximately 50% of loans it has insured lately wouldn’t qualify for the new rules. That’s not going to change come renewal time.

There are going to be a whole bunch of people in five years who will try to shop around and can’t. They just won’t qualify under the new rules, especially if they add debt.

I’ve seen it a million times. People clear their personal balance sheet to qualify for the mortgage. Then they pile the debt on top. These people had no chance to refinance a mortgage under the old rules. They now have a negative chance.

Wrap it up, yo

The government is making it pretty clear. The time to get rid of debt is now. The whole point of these new mortgage rules is to force both regular Joes and banks to get rid of risky loans. That’s ultimately good for the economy. It just might cause a little pain first.

When It comes time to refinance a mortgage, your existing bank isn’t going to try very hard to wow you. They know it just got a whole lot harder to shop around come renewal time.

 

Tell everyone, yo!