MORTGAGE SOLUTIONS

Don't become an orphan! Tips to ensure a mortgage renewal

While Canada may not have gone through a debilitating housing crisis like that in the U.S., the topic of "orphan loans" is one that has made it into the mainstream media and homeownership circles.

Between 2005 and 2008, before the credit crunch hit, a lot of U.S.-based subprime lenders made their way north of the border. These lenders offered an opportunity to  aspiring homeowners who couldn't qualify for a mortgage with the big banks. Individuals who had low credit scores, high debt ratios and small down payments could suddenly realize the dream of homeownership.

The problem is that when the credit crunch hit, those U.S.-based lenders either folded or scurried back south of the border, leaving many homeowners with subprime mortgages that no other lender wanted to touch. Now that those mortgages are coming up for renewal, those homeowners are threatened with having their dream taken away from them.

Some have failed to use the opportunity to increase their credit scores. Others have done everything right, but seen their property values plummet. Combine that with the change in mortgage rules – which have seen a minimum loan to value drop from 95% to 90% - many just don't have the equity available in their homes to renew their mortgage.

If you're at risk of becoming an orphan, there are things you can do. Below are a few of them:

Make sure your credit is in pristine condition.

Subprime loans were never designed to be a long-term mortgage solution, but rather a tool to get individuals back on their feet while simultaneously allowing them to enter the housing market. Make sure you've taken the necessary steps to eliminate your 'subprime' title – starting with ensuring your credit is up to snuff.

Get an appraisal now.

Real estate values differ drastically from one area to the next. If your mortgage is coming up for renewal in the next couple of years, and if you're concerned your value may have dropped, get it appraised today. Best case scenario, you have nothing to worry about. Worst case? You have enough information to implement a plan.

Reduce your mortgage as much as possible.

Under the new mortgage guidelines, the maximum mortgage you can take out on a property is 90% of its value. Once you know the value of the property, do what you can to ensure that you have at least 10% equity in it – whether it's by putting a lump sum down, or accelerating your payments. Some lenders, like National Bank, offer cash back mortgages which you can put towards your down payment. On the bank's 10-year term, for example, you can receive 8% cash back.

Be willing to compromise.

Unfortunately, if you're left with an orphaned mortgage you're stuck between a rock and a hard place. While lenders are willing to talk, you likely won't get the great rates that you're used to. If you're willing to have your mortgage insured under CMHC or Genworth, if the option is available, you'll likely become more appealing to lenders, although you'll have to cough up the extra premium. It will also be wise to cut down on your discretionary spending in the years leading up to the renewal to attempt to put a little bit extra against your mortgage. That being said, the compromises should be worth it if you're determined to remain a homeowner.