Refinancing a Mortgage during COVID-19
Over the past 6 weeks, due to the COVID-19 pandemic, thousands of Canadians facing job losses are rushing to refinance, according to a survey by Rates.ca. The 4 main reasons being to:
Lower their current interest rate
Lower their payments
Add a Home Equity Line of Credit (HELOC)
Pull out equity ahead of property value reductions.
If you’re one of the many hunting for a refinance, here are 5 things to consider in a COVID-19 world:
#1) Stricter Employment Verification: We have seen lenders asking clients to prove and demonstrate that they will not be laid off during the coronavirus shutdown. This is especially true where the client’s line of work is deemed non-essential. #2) Do the Numbers Add Up: Determine your interest savings by 1) finding out what the remaining term on your current mortgage is and 2) enter that into a rate comparison calculator. If applicable, estimate any interest savings from consolidating high-cost debt into your new mortgage and calculate these savings over your new term. From the two totals above, see with which you could out ahead. #3) Shop Rates: In March, we saw an increase in mortgage rates even though the Bank of Canada slashed its rate by 1.5 percentage points. As a result, banks are being forced to pay more for the money they lend out. However, these risk premiums are temporary. In a year or so, we should see rate discounts being lowered. You should consider a cheap shorter term. #4) Consider a HELOC: If you expect your income to be interrupted, a home equity line of credit can be a valuable source of emergency liquidity. Payments are interest-only and you can borrow below 3% (as of today)*. This is a much better option than credit card debts where the interest rate can be 19% and up. But remember, HELOCs must be put in place ahead of time. #5) Market Value Could Fall: Predictions are that property values may drop if the delay to re-open to “normality” gets extended even further.” At present market values are still holding up.. Lenders have been more conservative during COVID-19 when it comes to approvals on any type of mortgage transaction so the move to refinance, consolidate debts, or get some cash flow must be now.
Remember: You want to apply for a refinance before you absolutely need one and before property values drop.
* This is true for prime bank rate but not true if with a B bank.
Source: Rob McLister, “Refinancing a Mortgage During COVID-19", Rates.ca, accessed April 6 2020 https://rates.ca/resources/refinancing-mortgage-during-covid-19/