The weight of new mortgages

Rising interest rates and the decline in the value of many properties are putting thousands of Canadian families under severe financial pressure. In an interview with Milénio Stadium, Dennis da Cunha, a Level 2 Mortgage Agent with Mortgage Scout, explains the primary risks faced by homeowners approaching their mortgage renewal who are unable to meet the criteria required by banks.

Milénio Stadium: In practical terms, what is happening to the many people who reach the moment of refinancing only to discover they no longer meet the criteria required by the banks?

Dennis da Cunha: If a homeowner needs to refinance their mortgage to consolidate debt or adjust their amortization to help lower their monthly payments, they will need to qualify based on current market rates and the stress test, which is 2% higher than the contract rate the homeowner would be paying on the mortgage itself. The bank would also request a new appraisal to confirm the current value of the home. If the homeowner cannot qualify for the new mortgage due to insufficient income or bad credit, then a refinance for a new mortgage would not be approved by the bank. If the homeowner needs to extract equity or change their loan structure and the major banks (“A” lenders) say no, they would then be forced to seek alternative “B” lenders (credit unions or alternative institutions) or, in worse cases, private lenders. Alternative lenders are not long-term solutions; they come with significantly higher interest rates, steep upfront broker and lender fees, and shorter terms. Where things get complicated for well-qualified

homeowners who need to refinance is if the value of the property has decreased since they purchased their home or secured their mortgage. If the value has dropped below the bank’s threshold, the homeowner will not be approved by any lender, even if they have strong income and strong credit. This would force the homeowner to find a way to manage their finances month-to-month or, in the worst-case scenario, sell the property. The homeowner can also choose to stay with their current institution and simply renew the mortgage for another term. As long as the mortgage is up-to-date and no payments have been missed during the course of the term, the existing lender will typically offer the homeowner auto-renewal at today’s rates without forcing any new income verification, credit verification, or stress test on the homeowner. However, the homeowner loses some negotiation leverage since they are forced to accept whatever rate the bank offers.

MS: Many homeowners purchased properties when interest rates were extremely low. To what extent was a false sense of security created by the market and by the financial institutions themselves?

DdC: During the peak of the pandemic era, the prevailing narrative from central banks and financial institutions implied that interest rates would remain low for a very long time. This encouraged buyers to push their budgets to absolute maximum limits. Financial institutions readily qualified borrowers based on those rock-bottom variable rates, utilizing a stress test that proved inadequate for the massive interest rate shock that followed. Rates below 2% felt like a permanent reality rather than a historical anomaly. The entire real estate market, along with aggressive bank lending practices and promises that “real estate only goes up,” created an environment fueled by the fear of missing out (FOMO). It gave buyers the false impression that real estate prices would only ever move upward and that any delay meant being priced out of the GTA (Greater Toronto Area) forever.

MS: Have you noticed specific profiles that are more affected by this crisis—for example, investors, young families, newcomers, or people who turned to alternative lenders?

DdC: While the current environment impacts a wide cross-section of homeowners, three specific profiles are bearing the brunt of the mortgage shock:

1. Pre-Construction Condo Investors and Speculators: Many individuals bought units that are now completing in a market where valuations have softened. They face negative equity and massive rental cash-flow deficits, making it incredibly difficult to qualify for traditional financing. The largest segment to be impacted was speculators. Many used Home Equity Lines of Credit (HELOCs) secured against their primary residence to obtain the necessary down payment to purchase the unit from the builder. Many had no intention of closing or keeping the property upon completion. They were convinced that they could simply “assign” the purchase contract to another individual closer to completion for a higher price than they originally paid when they purchased from the builder. They would then pay off the balance on the home equity line of credit and keep the profit. Instead, these speculators are now “underwater” as they cannot close with the builder. Those who can close with the builder and fulfill their obligations will be sued by the builder in court for any losses incurred.
2. Young Families and First-Time Buyers (2020–2022): These buyers stretched their household budgets to the absolute limit to enter the market. They are now facing massive payment increases upon renewal while juggling stagnant wages and elevated everyday living costs.
3. Borrowers Stranded with Alternative or Private Lenders: Homeowners who took out short-term mortgages (1 to 2 years) with private or alternative “B” lenders, hoping rates would drop rapidly, find themselves stuck. Alternative “B” lenders operate much like a Schedule A bank. As long as the mortgage is in good standing and payments are up-to-date, the alternative lender will offer the homeowner an auto-renewal, but at significantly higher rates. Private lenders, however, are heavily tightening their risk exposure, refusing to renew terms or demanding capital paydowns that borrowers simply do not have.

MS: What typically happens to a family when a refinancing fails? Is there room for negotiation with the banks, or does the process lead quickly to a forced sale or foreclosure?

DdC: When a refinance fails, the bank does not immediately kick the family out. Banks want to manage debt, not own real estate, so a failed application rarely leads straight to a foreclosure. Instead, the family becomes “handcuffed” to their current lender. The bank will almost always offer an automatic renewal as long as the mortgage is up-to-date and in good standing, but the homeowner does lose negotiating power and must accept whatever rate is offered.

There is usually plenty of room for negotiation. Banks have loss mitigation teams to help struggling borrowers. If a family is proactive, the bank can extend their amortization period back to 30 years to lower the monthly payments. If that fails, a mortgage broker can pivot the family to an alternative “B” lender or credit union. The rates and fees are higher, but it acts as a safety net to keep them in the home. A forced sale is always the absolute last resort. In Ontario, banks use a legal process called Power of Sale to recoup their money quickly. However, this legal action only happens if a homeowner goes completely silent, misses multiple mortgage payments, and rejects every alternative solution.

MS: What advice would you give today to those who are worried about renewing their mortgage in the coming months? Are there still ways to avoid losing one’s home?

DdC: The most critical piece of advice is to take action early, ideally four to six months before your actual renewal date. Do not wait for your current bank’s automated letter to arrive in the mail.

1. Audit Your Finances Immediately: Review your household cash flow, check your current credit score, and minimize any non-mortgage debts to optimize your debt-service ratios before you apply anywhere.
2. Shop the Market Early: Work with an independent mortgage broker to scan the entire landscape of “A,” “B,” and alternative lenders. This gives you an objective view of your true borrowing options before your hand is forced.
3. Proactively Lengthen Amortization: If your monthly payment shock looks unmanageable, look into extending your amortization back out to 25 or 30 years to artificially lower the required monthly cash flow.
4. Consider Shorter Fixed Terms: Committing to a shorter 2-year or 3-year fixed rate can provide short-term budgetary certainty without locking you into today’s rates for half a decade if market conditions continue to normalize.

Madalena Balça/MS

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