Hundreds of thousands of Canadian households are still not paying their mortgages, by agreement with their lender.
Once those “payment deferrals” expire—and the bulk will expire by year-end—countless homeowners will have to shore up their personal balance sheets, quickly.
In fact, a new RATESDOTCA poll by Forum Research Inc.* found that one in eight mortgagors say it is “likely” or “somewhat likely” they will not be able to pay their mortgage in the next 12 months, resulting in them having to ask their lender to postpone (defer) their mortgage payments.
Failing that, many may be forced to sell or refinance their mortgage, or at least attempt to.
Knowing this led us to a logical question: How many Canadians will have to renegotiate their mortgage because of the pandemic?
The Latest Trend
A recent separate RATESDOTCA’s poll** asked if Canadians plan to refinance “in the next 12 months.” Here are the results.
Of those who have a mortgage and were able to answer:
- 80.3% do not plan to refinance
- 10.2% plan to refinance “due to COVID-19”
- 9.5% plan to refinance, but “for other reasons”
Refinances could become instrumental when widespread deferrals end, that is, to the extent borrowers qualify and have over 20% equity (generally the minimum required to refinance).
Factoid: Over three times as many men planned to refinance for COVID-19-related reasons than women.
Why Do People Refinance?
The main reasons people refinanced last year were to reconcile debt (34%) or fund home improvements (27%). That’s according to CMHC's Mortgage Consumer Survey.
In a typical year, roughly one in five mortgages are refinances. So, the number of people refinancing has not exploded by any means. That’s positive.
It is the reasons people are refinancing that have changed.
Quick Tip: If you have solid credit and provable income, the new RATESDOTCA Refinance Calculator can quickly estimate whether refinancing makes sense, based on one of four goals: interest savings, payment reduction, equity take-out or adding a HELOC. It even factors in prepayment penalties, which often make it uneconomical to refinance early.
Before February, COVID-19 was not a driving force in mortgage refinances. Today it very much is.
Once people come off their deferrals, we’ll see more attempts to refinance. Unfortunately, there could also be more resistance from lenders to approve COVID-impacted applicants. That’s especially true for those with a mortgage deferral on their credit report, and who:
a) Work in a vulnerable industry (food and beverage, travel, airlines, etc.),
b) Have monthly housing and debt costs totalling more than 40% of their gross monthly income, and/or
c) Have any credit blemishes from within the last year.
Four Potential Lifelines
If you do need to refinance—to consolidate debt or lower your payments—and you cannot get approved with a traditional lender, here are four tips:
- Talk to a broker — they have dozens of alternative lending options for those with 20% equity or more (in big cities like Toronto, sometimes only 10% equity is required, albeit the rates are much higher).
- Use “skip-a-payment" — some lenders allow one monthly payment to be skipped per year. If your deferral didn’t invalidate that option (policies vary by lender), then skipping one additional payment could buy you more time.
- Use back-up resources — These options are not appealing, but sometimes you’ve got to do what you’ve got to do. If you have access to low-cost “promotional” credit card cash advances or a secured/unsecured credit line, tapping those can be a bridge until your income is restored. Some homeowners might even be forced to withdraw from their RRSPs to make their mortgage payments. That has both retirement and tax implications so consider this option carefully.
- Worst case, sell — if you can’t keep up with your payments, you’re better off selling on your own terms than on your lender’s terms (that’s especially true when home values are strong, like they are right now).
In 2021, we’ll likely see mortgage brokers’ share of refinances increase temporarily given that brokers are the go-to source for harder-to-qualify customers. And, with lenders being somewhat skeptical of borrowers who have had a deferral, having dozens of lenders to choose from could be the difference between an approval or a decline.
About the surveys
* The second annual Financial Literacy survey was conducted by Forum Research between September 24 and October 1, 2020 and polled 1179 respondents across Canada. The sample's age ranged from 18 to 72+ years old. Margin of error is +2.85 % with 95% confidence. Survey questions were presented via telephone and respondents provided answers through the touchpad of their mobile device or home phone.
** A digital survey of 3,500 Canadians aged 18 years or older was conducted using Google Survey from August 31 to September 17, 2020.