One broker believes clients will have to turn to high interest loans as a result of refinance loan-to-value limits – and that these high interest loans may become more ubiquitous as a result.

“I’m afraid we might see a resurgence of high rate refinance companies as a result of CMHC’s 80 per cent loan-to-value cap,” John Lozinski of Verico Lozinski Mortgage Corp. told MortgageBrokerNews.ca. “Some people need to refinance for legitimate reasons and if they want to pass that 80 per cent threshold they will need to take on other loans.”

According to Lozinski, a number of U.S.-based companies specializing in high rate refinance loans were popping up across Canada before the economic downturn forced them back out of the market.

However, he fears they may return as economic conditions continue to improve south of the border.

Lozinski also points to Citi Financial’s high interest personal loans as one of the options certain Canadians must consider due to the government-sanctioned LTV restrictions for refinances.

According to Citi Financial’s website, it offers personal loans up to $20,000 at rates that range from 24.99 per cent to 35.99 per cent on 60 month terms.

Refinances dropped by 40 per cent in 2011, as a result of mortgage rule changes.

More recently, the Crown Corporation conducted a survey of 3,510 recent mortgage consumers and determined that 20 per cent had refinanced their mortgage.

For his part, John Greenlee of the Mortgage Centre believes there are still options for clients who require higher than 80 per cent LTV refinance.

“Obviously you run into clients who want to go above 80 per cent; some lenders offer cash back options and sometimes that’s enough,” he said. “Citi Bank offers high interest loans and I’ve had clients come in to refinance and get out of those loans.”

According to the Manulife Bank of Canada Debt Survey, released Tuesday, many Canadians would struggle to make mortgage payments in the event of a rate hike — an indication that buyers aren’t given the proper mortgage advice, according to one player.

“I think people are taking on a huge amount of debt and it could definitely come back to haunt us if something happens like interest rates rising or a housing correction,” Michael Sjerven of Verico Vivid Mortgage told MortgageBrokerNews.ca. “We just need to be a little more conservative and as brokers focus on more than just getting a client approved for what they qualify for.

The study found that more than one third of homeowners would have trouble making mortgage payments if their monthly payment were to increase by 10 per cent. A further 15 per cent admitted they could not afford any increase in payment.

Still, four in ten homeowners made an extra payment on their mortgage in the last 12 months and 56 per cent of homeowners reduced their debt.

“These results are encouraging,” Rick Lunny, President and Chief Executive Officer, Manulife Bank of Canada said in an official release. “Effective debt management is absolutely central to long-term financial health, and clearly many Canadians are taking advantage of the low-rate environment to reduce their debt.”

The survey also found that a job loss would place a sizable burden on many Canadians to effectively make mortgage payments. Four in ten admitted they would struggle to make mortgage payments within three months of losing their job and one is six admitted they would struggle within the first month.

And household debt remains a concern.

“While household debt to GDP has fallen significantly in the US since the onset of the financial crisis, it has been on a constant march upward in Canada,” said Megan Greene, Chief Economist, Manulife Asset Management. “This private debt overhang poses a risk to Canadian growth. It is positive news indeed that Canadians are finally looking to deleverage.”

Manulife surveyed 2,372 homeowners across the country between February 10 and February 27. All participants were between the ages of 20 and 59 and had a minimum household income of $50,000.

It’s one of the clear advantages brokers offer clients hunting for a mortgage, but even that is being threatened by mortgage specialists arguing the hit attached to their credit checks are much lower than those undertaken by brokers.

“It’s totally false,” says Ron Butler of Butler Mortgage. “We hear this constantly – the bankers are trained to say it.”

Butler is referring to the claim by mortgage specialists that they are able to perform credit checks that result in just a two-point hit to a client’s credit score as opposed to the eight-point penalty they claim is attached to a broker query.

It’s a boast that Butler and others argue as just another way for banks to attract and keep mortgage clients.

But there is a remedy to that type of fear mongering that keeps clients locked into bank mortgages: education.

John Panagakos, a principal broker with Dominion Lending Centres, says he informs clients that multiple checks in a short period of time will have just a small impact on score.

“If a client is shopping around for a mortgage, the credit bureau has built in a model that (allows for) multiple hits and it won’t drastically affect your credit score,” he says.

Even still, that one-time hit is often negligible against the credit score. And, as Butler explains to his clients, there are bigger threats to credit score than pulling up a report.

“What the consumer really needs to understand is the things that affect their credit is maxing out lines of credit or credit cards, rather than a couple of credit pulls,” Butler says. “Leaving your line of credit maxed out, month in and month out, is massively more impactful than a couple of credit pulls.”

Patrick Smith, a mortgage broker with Dominion Lending Centres, contends that the two-point cost of a credit check at the bank – however false – certainly removes that particular advantage from brokers’ arsenals, but he believes the impact to his business would be minimal.

“When you throw away eight points versus two points, (brokers are still) saving the clients the leg work of looking around and being well-versed in what terms are favourable and the things that banks aren’t necessarily disclosing,” he says.

Brokers frustrated by high prepayment penalties for clients are calling for more government oversight.

“The federal government needs to step in and set a single formula that all lenders are mandated to follow, thus protecting all consumers,” Blair Goodman of Dominion Lending Centres National wrote on MortgageBrokerNews.ca

Several industry players were quick to agree with Goodman’s suggestion, citing excessive penalties doled to clients by certain lenders.

“The big banks have all reduced their posted rates below five year terms, thus creating a massive IRD day one after signing a five year fixed mortgage,” Peter Pasula of Domionion Lending Centres Coquitlam Mortgage Brokers wrote. “A recent … client with 2.79 fixed rate and 3.5 years remaining on the term was quoted +$50k for a penalty. Low rates like this should not have any IRD penalty.”

The discussion was sparked by an MBN article about the various prepayment penalty calculations used by different lenders.

“There are so many different ways lenders calculate penalties – certain lenders will use the posted rate and not the discounted rate that was offered to the client,” Narish Maharaj of Dominion Lending Centres Mortgage Mentors told MortgageBrokerNews.ca. “Others will subtract the client rate from the T BILL rate and subtract the client’s rate to determine the penalty.”

According to Mararaj, not only are certain lenders doing whatever they can to saddle clients with the largest possible penalty, it can become confusing when dealing with all the various rules.

“Trying to figure out the penalty is frustrating [from lender to lender] and many of them are creating much bigger spreads,” he said.

The mortgage market south of the border is suffering some volatility currently as bond market yields have increased leading to a spike in mortgage rates. CNBC reports that the trend is for rates to increase and a senior mortgage loan originator Matt Weave told the broadcaster that the market is “definitely in panic mode” as the Fed gets closer to increasing interest rates. Meanwhile the Mortgage Bankers Association reports that new home loan applications fell last week by a seasonally-adjusted 7.6 per cent from the week before, even after accounting for the Memorial Day holiday. The unadjusted index fell 17 per cent.