With job losses imminent and people fearing the mortgage process may grind to a halt, thousands of Canadians are rushing to refinance. That’s contributed to a lending surge we haven’t seen in ages.
People generally refinance for similar reasons, the most popular being switching to a lower rate (34%), moving to a new home (25%) and taking out equity (14%). That’s according to a recent Rates.ca survey.
But this year, we’re seeing more borrowers rush to refinance to give themselves a safety net by:
- Resetting their rate lower
- Lowering their payments
- Adding a Home Equity Line of Credit (HELOC)
- Pulling out equity ahead of potential job loss or property value reductions.
If you’re one of the thousands hunting for a refinance, here are seven things to consider in a COVID-19 world:
1. Stricter Employment Verification: If your job is not deemed essential by the government, the lender may make you prove you will not be laid off during the coronavirus shutdown.
2. Refinances are Low Priority: Banks are still offering refinances, but they’re deprioritizing them behind purchases and lender switches. That’s due to high demand and lending, appraisal and signing (legal) bottlenecks. It’s possible it could take 30 to 40+ days to close a refinance in this market, depending on the lender. The lower the lender's advertised rate, often the busier they are and the longer it takes to close.
3. Calculate Your Penalty: If you’re breaking an existing closed mortgage to refinance, you’ll pay a penalty. About 43% of Canadians have previously had a 5-year fixed and almost half of them (47%) refinanced or terminated their mortgage early. One in four who refinanced and/or broke their mortgage early paid a penalty of over $1,000. Many pay thousands more.
Step one is to check your mortgage contract and figure out how your lender will calculate your prepayment penalty. If you want an estimate of how much your penalty will be, here’s a list of penalty calculators by major lenders. The goal is to ensure a penalty doesn’t eat up all your refinance savings:
Major Lenders and Banks:
- Equitable Bank
- First National
- ICICI Bank
- Investors Group
- Laurentian Bank
- London Life
- National Bank
- Radius Financial
- RMG Mortgages
Penalty Basics: Penalties are generally 3-months' interest on variable-rate mortgages and the greater of 3-months' interest or the interest rate differential (IRD) on fixed-rate mortgages. If you’re not sure how mortgage penalties work, read this first.
Pro-tip: If you want to avoid expensive penalties, consider smaller lenders as opposed to major banks. Major banks routinely use posted-rate calculations that can boost penalties by thousands of dollars.
4. Do the Math: If you want to refinance into a cheaper rate, here's how to run the numbers:
- A) Figure out your remaining term (if you have three years left on a 5-year term, your remaining term is three years).
- B) Plug that into a rate comparison calculator to determine your interest savings.
- C) If applicable, estimate any interest savings from consolidating high-cost debt into your new mortgage (calculate this savings over your new term)
- D) From the total of B and C, subtract your penalty and closing costs (roughly $1,000) to see if you come out ahead.
5. Shop Rates: Mortgage rates have climbed even though the Bank of Canada slashed its overnight rate by 1.5 percentage points in March. The reason: investors are worried about bank risk. That’s forcing banks to pay more for the money they lend out. These “risk premiums,” as some people call them, are temporary. For that reason, don't overpay for a 5-year fixed or variable. Rate discounts could be better within a year or so, and rates are expected to stay low. So, if it matches your risk tolerance and your finances are stable, consider a cheap shorter term if you can find one.
6. Consider a HELOC: Home equity lines of credit can be a valuable source of emergency liquidity if your income is interrupted. Payments are interest-only and you can borrow below 3% (as of today) to get through tough times. That's a far better alternative to racking up credit card debt with 19%+ interest. But HELOCs must be put in place ahead of time. Getting approved requires excellent credit, stable employment and a reasonable debt-to-income ratio. And if you live beyond your means, stay away from credit lines!
As we speak, you can still find HELOCs at prime minus 0.10 percentage points (i.e., 2.35%). That’s a spectacular rate for a fully open, on-demand credit line that can be locked in at any time. As HELOC demand and credit delinquencies rise, such rates could disappear.
7. Loan-to-Values (LTVs) Could Fall: If you live in an area that's rural, overvalued or hard-hit by economic misfortune — like plant shutdowns or the oil industry collapse — your home value may come in lower than expected. When recessions approach, lenders and appraisers alike become more cautious. Lenders are especially conservative on lending values if your credit and income/employment are below-average. Remember: You want to apply for a refinance before you absolutely need one, and before property values fall.