Renewal Advice When the Client Cannot Qualify
A borrower in Medicine Hat has a $298,000 mortgage coming up for renewal in 60 days. His income dropped when he moved from salaried to contract work eight months ago, and his current lender's renewal offer is at 6.8% - well above the 5.2% he sees advertised. He asks the broker to shop the market. The broker runs the numbers and finds that under the stress-test qualifying rate, the borrower's debt service ratios exceed the lender's limits at every prime lender, largely because his contract income is under one year old and his line of credit balance has grown to $31,000. A private lender will approve at 9.4% with a 1.5% fee. The borrower says he cannot afford 9.4% and asks the broker to 'just tell the bank my old salary.'
1. What are the borrower's realistic options, and how should the broker present them?
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There are three realistic paths: accept the current lender's 6.8% renewal, which requires no requalification because it is a renewal with the existing lender; move to the private lender at 9.4% plus a 1.5% fee; or take steps to improve the file - for example, reducing the $31,000 line of credit, providing additional contract income documentation, or waiting until the contract income reaches the one-year mark - and then shop the market. The broker should lay out the cost of each in dollars per month and over the term, not just the rate. The renewal at 6.8% is likely the cheapest immediate option even though it is above advertised rates, because the private option carries a fee and a much higher rate. Presenting this honestly, even though it means less commission, is the core of the suitability duty.
2. How should the broker respond to the request to state the old salary?
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The broker must refuse. Stating a salary the borrower no longer earns is a misrepresentation, and the fact that the borrower cannot qualify on his real income is precisely the risk the lender is trying to assess. The broker should explain that the application would be inaccurate and that a lender discovering the change - at funding or later - could call the mortgage or pursue the borrower. The broker should redirect to the legitimate options: documenting contract income as fully as possible, reducing the line of credit, or accepting the renewal while working toward requalification. The broker should also be clear that the refusal protects the borrower, not just the broker.
3. The borrower chooses the private lender. What must the broker ensure before that placement proceeds?
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The broker must confirm the borrower understands the full cost - the 9.4% rate, the 1.5% fee (about $4,470 on $298,000), any discharge or appraisal costs, and the exit implications of a private term - and that the borrower has compared this against the renewal. The broker should document that alternatives were presented and why they were not available, and confirm the private lender's product is suitable given the borrower's stated plan to requalify. The broker must also disclose all compensation from the private lender and ensure the borrower knows the broker's role. If the borrower cannot afford the payments, the broker should say so rather than place the loan and let the problem surface later.