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Should you refinance your mortgage in the COVID-19 crisis?

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Should you refinance your mortgage in the COVID-19 crisis?

The COVID-19 pandemic has presented all kinds of unprecedented challenges, affecting both household finances and the global economy. During the crisis, many are considering refinancing their mortgages. But is this actually a good time for you to refinance your mortgage? This is really a question best answered with a professional, such as a mortgage broker, who can walk you through all of your options and personal circumstances. And this consultation is free of charge.

Here’s what you need to know about whether you should refinance your mortgage during the COVID-19 crisis.

What is refinancing a mortgage?

A mortgage refinance is when you break your current mortgage and start a new one. Your old mortgage is paid off by the new mortgage, which gives you the chance to borrow additional cash or change the conditions of your original contract. While you’ll be charged a prepayment penalty for breaking your mortgage, the benefits of starting a new mortgage may be worth it.

The three main reasons you might consider refinancing are:

  1. Accessing equity
  2. Lowering your rate
  3. Consolidating debt

Another thing to note is that if your mortgage is coming up for renewal (and your financial situation is stable) now could be a good time to refinance. Refinancing is generally less expensive when it is done at renewal time.

How much can a refinance cost?

Refinancing a mortgage means breaking your mortgage early, which will incur at least two costs. First, a lawyer must change the financing on title, and this cost is sometimes fully or partly covered by the lender.

The more significant cost is your prepayment penalty, which your current lender charges you for breaking your mortgage contract. This amount is calculated as either three months’ interest or the interest rate differential payment (IRD), whichever is greater.

Example: The penalty for refinancing a mortgage with a remaining balance of $300,000 with BMO, that has two years left on the current term, a fixed rate of 3.00 per cent, and a 25-year amortization could cost about $8,000, according to the ratehub.ca Penalty Calculator.

3 reasons to refinance your mortgage

There are three main reasons you might want to refinance your mortgage during the COVID-19 pandemic.

Regardless of your motivation, you shouldn’t refinance if you’re in a shaky financial position due to COVID-19. Refinancing your mortgage means you’ll need to requalify, which is the last thing you want to do if you’ve lost income or can’t make your payments, as you could end up in a worse position. If this applies to you, check the alternatives to refinancing, below.

1 – Accessing equity in your home

Equity is the part of your home you actually own, worked out by taking the market value of the property, less the remaining mortgage balance you have on it. If you’ve built up equity in your home, you might be able to get a loan using your equity as collateral.

There are several ways to access your home equity, and two important options to consider are:

Option 1: Accessing equity by refinancing

When refinancing your mortgage, you can choose to increase your current mortgage balance to access a lump sum of money from the amount you’ve already previously paid off. You would start a new mortgage with a higher mortgage amount that includes the additional cash amount you want to take out, plus your remaining balance. Because it is a new mortgage, you’ll start paying interest on the additional amount immediately, so this option makes sense if you know with certainty that you require that extra cash in the near future.

Option 2: Obtaining a Home Equity Line of Credit (HELOC)

Another way to tap into your home equity is through a Home Equity Line of Credit, or HELOC. A HELOC works a bit like a credit card in how you access the funds – you just draw money from your HELOC. You can then choose to pay a minimum of just the interest on the HELOC loan each month, in addition to your mortgage payment. HELOCs are normally used for big one-off costs, such as remodeling your home or university tuition, but they can also be used as a personal line of credit. HELOCs make sense if you are concerned that you may need some extra cash in the future but don’t really need it right now.

Bonus option: Refinance to get a HELOC

You’ll only be able to use a HELOC if you originally opted for a mortgage that included one. If your current mortgage doesn’t include a HELOC, refinancing allows you to get one added to your current mortgage. Moreover, since you are already refinancing to get the HELOC, you can make any necessary adjustments to your mortgage at the same time.

2 – Lowering your rate

In Canada, mortgage rates are adjusted regularly. In normal circumstances one of the most common reasons to refinance is to get a lower rate, which can save you money on interest over time. When those savings are more than the prepayment penalties, it makes good financial sense to refinance.

During COVID-19, the situation is a little more complex. Bond yields are extremely low, and the Bank of Canada’s overnight rate target is at a record low of 0.25 per cent. Normally, such conditions would warrant low mortgage rates to be available. However, mortgage lenders are now pricing in a risk premium. This results in higher mortgage rates so that lenders can somewhat protect themselves from uncertainty in unemployment and the overall economy.

The upshot is rates aren’t as low as you might expect given current market conditions. That means it could be unlikely that you’ll get a low enough mortgage rate that will justify the cost of prepayment penalties. Check ratehub.ca’s mortgage refinance calculator to run the numbers for yourself.

3 – Refinancing to consolidate debt

Because mortgages are secured loans, they have lower interest rates than other sources of credit, such as credit cards or personal loans. As such, they’re a great place to consolidate your debts, thus reducing the overall amount of interest you pay.

This is done is by accessing your home’s equity. When refinancing, you’ll take out a larger mortgage than you need to pay off your current mortgage, then use that cash to pay off your other debts. This gives you a single payment to make each month, likely at a lower overall rate (versus the various interest rates of your other loans).

Alternatives to mortgage refinancing during COVID-19

If you’ve lost income or can’t make your payments due to the COVID-19 crisis, now is probably not a good time to refinance your mortgage. This is because you’ll need to requalify for your new mortgage. If your financial situation is not as good as it was when you took out your existing mortgage, you may not qualify, or could end up with a worse deal.

If you need to free up cash, for whatever reason, there are a few alternatives to consider:

  • Ask family for help: If you have parents or other family members who haven’t been hit as hard by the pandemic, consider asking them for help. This is never easy, but if there’s a time that people will understand, it’s now.
  • Get government assistance: If you haven’t yet done so, make sure to check if you or other members of your family are eligible for government assistance, such as EI or the CERB.
  • Mortgage deferral: Canada’s big banks have offered to defer mortgage payments in an effort to assist those who have lost income. Mortgage deferral isn’t free, but it could help if you’re struggling to pay your monthly bills.

The bottom line: Is the COVID-19 crisis a good time to refinance?

If you’re in need of cash during this pandemic, but aren’t in dire financial straits, then refinancing could be an option for you during this time. Additionally, it might be worth refinancing if mortgage refinance rates are significantly lower than your current rate.

However, you’ll need to consider your own needs and circumstances. The best thing to do is speak to a mortgage professional, who can give you a free personal assessment – do it sooner rather than later. They’ll be able to help you calculate costs and consider different options available to you during the coronavirus pandemic.

This article has been republished with permission from ratehub.ca, a website that compares mortgage rates, credit cards, high-interest savings accounts, chequing accounts and insurance to empower Canadians to search smarter and save money.

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June_20_RE_Newsletter_Ratehub_fi

Should you refinance your mortgage in the COVID-19 crisis?

Latest News


Should you refinance your mortgage in the COVID-19 crisis?

This article has been republished with permission from ratehub.ca.

The COVID-19 pandemic has caused a world of trouble, affecting both household finances and the global economy. During the crisis, many are considering refinancing their mortgages. But is the coronavirus pandemic a good time for you to refinance your mortgage?

First, a disclaimer. Whether you should refinance during the coronavirus pandemic is a question best answered with a professional who can walk you through all of your options and personal circumstances. Speaking to a mortgage professional such as a mortgage broker is the best thing you can do (and consulting with one is free of charge).

Here’s everything you need to know about refinancing your mortgage during the COVID-19 crisis.

What is refinancing a mortgage?

A mortgage refinance is when you break your current mortgage and start a new one. Your old mortgage is paid off by the new mortgage, which gives you the chance to borrow additional cash or change the conditions of your original contract. While you’ll be charged a prepayment penalty for breaking your mortgage, the benefits of starting a new mortgage may be worth it.

There are three main reasons you might consider refinancing, which are:

  1. Accessing equity
  2. Lowering your rate
  3. Consolidating debt

Another thing to note is that if your mortgage is coming up for renewal (and your financial situation is stable) now could be a good time to refinance. Refinancing is generally less expensive when it is done at renewal time.

How much can a refinance cost?

Refinancing a mortgage means breaking your mortgage early, which will incur at least two costs. First, a lawyer must change the financing on title. This cost is sometimes fully or partly covered by the lender.

The more significant cost is your prepayment penalty, which your current lender charges you for breaking your mortgage contract. This amount is calculated as either three months’ interest or the interest rate differential payment (IRD), whichever is greater. Check the Ratehub.ca mortgage refinance calculator to run your own numbers and learn more.

Example: The penalty for refinancing a mortgage with a remaining balance of $300,000 with BMO, that has two years left on the current term, a fixed rate of 3.00 per cent, and a 25-year amortization could cost about $8,000, according to the ratehub.ca Penalty Calculator.

3 reasons to refinance your mortgage

There are three main reasons you might want to refinance your mortgage during the COVID-19 pandemic. Keep in mind that during the current crisis, some may not be practical for your situation.

Regardless of your motivation, you shouldn’t refinance if you’re in a shaky financial position due to COVID-19. Refinancing your mortgage means you’ll need to requalify, which is the last thing you want to do if you’ve lost income or can’t make your payments, as you could end up in a worse position. If this applies to you, check the alternatives to refinancing section below.

1. Accessing equity in your home

Equity is the part of your home you actually own, worked out by taking the market value of the property, less the remaining mortgage balance you have on it. If you’ve built up equity in your home, you might be able to get a loan using your equity as collateral.

There are several ways to access your home equity, two important options to consider are:

Option 1: Accessing equity by refinancing

When refinancing your mortgage, you can choose to increase your current mortgage balance to access a lump sum of money from the amount you’ve already previously paid off. You would start a new mortgage with a higher mortgage amount that includes the additional cash amount you want to take out plus your remaining balance. Because it is a new mortgage, you’ll start paying interest on the additional amount immediately, so this option makes sense if you know with certainty that you require that extra cash in the near future.

Option 2: Obtaining a Home Equity Line of Credit (HELOC)

Another way to tap into your home equity is through a Home Equity Line of Credit, or HELOC. A HELOC works a little like a credit card in how you access the funds – you just draw money from your HELOC. You can then choose to pay a minimum of just the interest on the HELOC loan each month, in addition to your mortgage payment. HELOCs are normally used for big one-off costs like remodelling or university tuition, but they can also be used as a personal line of credit. HELOCs make sense if you are concerned that you may need some extra cash in the future but don’t really need it right now.

Bonus option: Refinance to get a HELOC

You’ll only be able to use a HELOC if you originally opted for a mortgage that included one. If your current mortgage doesn’t include a HELOC, refinancing allows you to get one added to your current mortgage. Moreover, since you are already refinancing to get the HELOC, you can make any necessary adjustments to your mortgage at the same time.

2. Lowering your rate

In Canada, mortgage rates are adjusted regularly. In normal circumstances one of the most common reasons to refinance is to get a lower rate, which can save you money on interest over time. When those savings are more than the prepayment penalties, it makes good financial sense to refinance.

During COVID-19, the situation is a little more complex. Bond yields are extremely low, and the Bank of Canada’s overnight rate target is at a record low of 0.25 per cent. Normally, such conditions would warrant low mortgage rates to be available. However, mortgage lenders are now pricing in a risk premium. This risk premium results in higher mortgage rates so that lenders can somewhat protect themselves from uncertainty in unemployment and the overall economy.

The upshot is rates aren’t as low as you might expect given current market conditions. That means it could be unlikely that you’ll get a low enough mortgage rate that will justify the cost of prepayment penalties. Check ratehub.ca’s mortgage refinance calculator to run the numbers for yourself.

3. Refinancing to consolidate debt

Because mortgages are secured loans, they have lower interest rates than other sources of credit, such as credit cards or personal loans. As such, they’re a great place to consolidate your debts, thus reducing the overall amount of interest you pay.

The way this is done is by accessing your home’s equity. When refinancing, you’ll take out a larger mortgage than you need to pay off your current mortgage, then use that cash to pay off your other debts. This gives you a single payment to make each month, likely at a lower overall rate (versus the various interest rates of your other loans).

Alternatives to mortgage refinancing during COVID-19

If you’ve lost income or can’t make your payments due to the COVID-19 crisis, now is probably not a good time to refinance your mortgage. This is because you’ll need to requalify for your new mortgage. If your financial situation is not as good as it was when you took out your current mortgage, you may not qualify, or could end up with a worse deal.

If you need to free up cash, for whatever reason, there are a few alternatives to consider:

  • Ask family for help: If you have parents or other family members who haven’t been hit as hard by the pandemic, consider asking them for help. This is never easy, but if there’s a time that people will understand, it’s now.
  • Get government assistance: If you haven’t yet done so, make sure to check if you or other members of your family are eligible for government assistance, such as EI or the CERB.
  • Mortgage deferral: Canada’s big banks have offered to defer mortgage payments in an effort to assist those who have lost income. Mortgage deferral isn’t free, but it could help if you’re struggling to pay your monthly bills.

The bottom line: Is the COVID-19 crisis a good time to refinance?

If you’re in need of cash during this pandemic, but aren’t in dire financial straits, then refinancing could be an option for you during this time. Additionally, it might be worth refinancing if mortgage refinance rates are significantly lower than your current rate.

However, you’ll need to consider your own needs and circumstances. The best thing you can do is speak to a mortgage professional such as a mortgage broker, who can give you a free personal assessment – do it sooner rather than later. They’ll be able to help you calculate costs and consider different options available to you during the coronavirus pandemic.

Ratehub.ca compares mortgage rates, credit cards, high-interest savings accounts, chequing accounts and insurance with the goal to empower Canadians to search smarter and save money.

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Securing a mortgage

Looking to secure a mortgage? Now is the best time to negotiate

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Looking to secure a mortgage? Now is the best time to negotiate

 

Securing a mortgage

The Bank of Canada again held its influential overnight lending rate today at 1.75 per cent, signalling the continuation of a stable interest rate environment – and underlining that now may be the best time to negotiate a mortgage.

Why? We’ll get to that in a second.

First, the BoC held the rate for the fifth straight announcement – it’s been at 1.75 since October 2018 – citing growing evidence that the Canadian economic slowdown in late 2018 and early 2019 is now being followed by a pickup in the second quarter this year. Housing market indicators point to a more stable national market, albeit with continued weakness in some regions.

In addition, the Bank says, continued strong job growth suggests that businesses see the weakness in the past two quarters as temporary, with recent data supporting an increase in both consumer spending and exports in the second quarter, and it appears that overall growth in business investment has firmed.

“The Bank’s language indicates that things will need to change to the positive or negative in order to move from their current rate strategy,” says James Laird, co-founder of Ratehub Inc. and president of CanWise Financial. “Therefore, Canadians can expect a stable rate environment for the foreseeable future.

“This announcement should bring peace of mind to consumers currently in a variable rate mortgage because it is unlikely that the prime rate will increase anytime soon,” he adds. “Going forward, a decrease seems as likely as an increase, which is also good news if you’re in a variable rate.”

Mortgage seasonality

Canadians may also be able to take advantage of seasonality in the mortgage industry to score the best deal on their lending rate. Just like spring is known as traditionally the busy season in real estate, it’s also a very good time of year to secure a mortgage.

Securing a mortgage to buy a condo in Toronto

Ratehub.ca, for example, analyzed historical rate data from 2016 to 2019 to identify the best times of year for Canadians to lock in to a rate, or refinance an existing mortgage.

According to Ratehub.ca’s historical data on the best five-year fixed and variable rates, Canadians have access to the lowest rates during the spring homebuying season – between April and July – every year. The second most competitive time period for mortgage rates occurs between October and December.

A similar story played out in 2017 when the average best five-year fixed rate fell to 2.4 per cent from 3.32 per cent, and the average variable rate dropped from 2.09 per cent to 2.04 per cent.

ALSO READ: Ontario releases plan to address housing affordability and supply issues

ALSO READ: Variable vs fixed mortgages? It’s complicated

A year later, 2018 proved that while a rising rate environment can override the benefits any spring mortgage deals, mortgage holders still benefited from certain promos. The average best five-year fixed rate increased from 2.94 per cent from January to March to 3.07 per cent, but the average best variable rate fell from 2.17 per cent to 1.96 per cent. Lenders actually slashed fixed rates over that period.

Spring promotions

“Lenders and mortgage providers come out with their strongest promotions during the busy spring and summer homebuying season,” Laird says. “Regardless of the interest rate environment, springtime is when lenders are willing to make the smallest margins in order to win business.”

During this period, many lenders will choose at least one rate and term to price very aggressively in order to attract attention to all of their mortgage products. Lenders also come out with special promotion offers to incentivize borrowers to lock in a rate. Consumers can expect to see cash-back deals to help with closing costs and refinance fees. Some lenders offer extra-long rate holds during this period. For example, BMO is currently offering a 130-day rate hold. The “30-day quick close rate” is another promotion many lenders opt for – this is a discounted rate that applies if your mortgage is closing in the next 30 to 45 days.

It’s crucial that lenders remain competitive through the spring market, Ratehub says, to hit their annual mortgage volume targets. In most cases, lenders will hit their targets during the second quarter (April to June) and, as a result, tend to be less competitive with promotions during the latter half of the year.

Consumers will typically see rates fall again in October, in the lead up to Oct. 31, when all of Canada’s major banks end their fiscal year. Lenders that want to get an early start on their targets for the following year often come out with promotions during this time period.

Bank results

Further benefiting the mortgage landscape for Canadians is that Canada’s big banks this week are reporting lower second quarter profits than expected.

“The poor results reported by Canada’s big banks in Q2 2019 could be good news for mortgage consumers,” Laird told Homes Publishing. “In light of these results, it would be unsurprising if the banks aggressively try to win mortgage business by offering lower rates to consumers or promotions to attract more business in the latter half of 2019.”

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Bank of Canada

Bank of Canada holds interest rate for now, but hikes still to come

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Bank of Canada holds interest rate for now, but hikes still to come

 

Bank of Canada

The Bank of Canada held its target for the overnight rate at 1.75 per cent on Jan. 9, where it has been since October 2018, and is lowering its growth forecast this year for Canada and around the world.

After raising the rate three times last year, some experts expected the Bank would do so again, either in late 2018 or early this year.

So, what does this latest non-action mean, and what can Canadian consumers expect in the coming months?

“The Bank gave several reasons for its decision to keep rates steady,” says Rubina Ahmed-Haq, personal finance guru and Homes Publishing columnist. “This includes lower oil prices, a weaker outlook for the global economy and Canada’s economy slowing more than expected.

Weaker investment

“It was a surprise that market pessimism did not come up,” she adds. “Despite stock market volatility making headlines for the last two months, there was no mention of the wild swings investors have been experiencing. The Bank did talk about weaker consumer spending and housing investment. This could be because of Canadian investors watching their portfolios and not feeling as confident in their spending.”

Sill, Ahmed-Haq says, the Bank remains very rosy on Canada’s economy, noting it has performing well overall. In its statement, the Bank says, “Growth has been running close to potential, employment growth has been strong and unemployment is at a 40-year low.” But still not enough to raise rates at this time.

Energy sector a concern

“The energy sector has been a concern for the Bank for some time now, but there seems to be a new focus on the housing sector, especially on the impact of mortgage guidelines changes and the five rate increases that have happened in the past 18 months,” James Laird, co-founder of Ratehub Inc. and President of CanWise Financial mortgage brokerage, told Homes Publishing.

Ahmed-Haq and Laird agree we should still expect higher rates in the coming months.

“The policy interest rate will need to rise over time into a neutral range to achieve the inflation target,” says Ahmed-Haq.

Rate hikes to come

Forecasters are now predicting two rate hikes this year, down from earlier predictions of as many as three rates hikes in 2019.

“The Bank’s moderated outlook in the last two announcements has caused bond yields in Canada to drop lower than any point in 2018,” says Laird. “However, we are yet to see a corresponding decrease in mortgage rates. We would advise consumers to keep a close eye on mortgage rates in coming weeks.”

 

Highlights from the Bank’s announcement

  • Bank of Canada maintains target for overnight rate at 1.75 per cent
  • Canadian economy performing well overall
  • Employment growth strong
  • Unemployment rate at 40-year low
  • Canadian consumption spending and housing investment weaker than expected
  • Housing markets adjusting to municipal and provincial measures, new mortgage guidelines and higher interest rates
  • Household spending to be dampened by slow growth in oil-producing provinces
  • Real GDP growth forecast at 1.7 per cent for 2019
  • Growth of 2.1 per cent forecast for 2020

 

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Mortgage Rates web

Interest rate hikes may not cost you as much as you think

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Interest rate hikes may not cost you as much as you think

Mortgage Rates web

By Wayne Karl

When the Bank of Canada announced an interest rate hike  on Oct. 24 – and within hours all of Canada’s major banks followed suit in hiking their prime lending rates – consumers largely groaned.

All of CIBC, TD Canada Trust, Scotiabank, RBC Royal Bank and BMO Bank of Montreal almost immediately issued virtually the same statement, word for word: “(Insert bank name here) announced that it has increased its prime lending rate by 25 basis points from 3.70 per cent to 3.95 per cent, effective Oct. 25, 2018.”

Yes, the numbers, too, are identical.

BoC had already raised its influential overnight rate target three times since July 2017, to 1.5 per cent from 0.75 per cent, and now this most recent hike to 1.75 per cent, while hinting that further increases are likely.

For mortgage holders, though, the increases may not cost you as much as you fear.

Fixed rates

The majority of Canadian mortgage holders are on fixed-rate products, which is why a more moderate pace of rate increases likely won’t impact the market significantly, according to Canada Mortgage and Housing Corp. (CMHC).

Nearly half of existing mortgages in Canada will come up for renewal in 2018, according to a data release from CIBC Capital Markets. However, despite having to renew their mortgage in a rising interest rate environment, a borrower with a five-year mortgage rate may be able to get a better deal on their mortgage renewal today than when they entered the housing market five years ago.

According to calculations from mortgage rate comparison website  Ratehub.ca:

The best five-year fixed rate in September 2013 was 3.29 per cent. With that rate, a borrower with a $400,000 mortgage amortized over 25 years would have had a monthly mortgage payment of $1,953 over the last five years.

If that same borrower renewed their mortgage at today’s best five-year fixed rate of 3.19 per cent, their monthly mortgage payment would decrease by $17 per month to $1,936.

“Canadians who require a new mortgage in coming months should lock in a fixed rate as soon as possible,” says James Laird, co-founder of Ratehub Inc. and president of CanWise Financial. “This includes those who are purchasing a home, and homeowners whose mortgage is coming up for renewal.

“Remember that, on average, mortgage providers will offer their existing customers a discount of 0.25 per cent off their posted rate on a renewal. However, there may be more competitive rates out there. Be sure to shop around online or use a mortgage broker to negotiate the best rate for your renewal.”

Laird says borrowers should begin shopping around 120 days in advance of their renewal date in order to negotiate a competitive mortgage rate.

A rising interest rate environment could put downward pressure on home prices, he says, but upward pressure will come from predicted economic growth, lack of housing supply, immigration and first-time homebuyers.

Variable rates

“Borrowers should expect variable rates to perfectly correlate with Bank of Canada rate increases,” Laird says. “Variable rate mortgage holders should also be prepared for several increases to their interest rate in coming months and, with general interest rates in Canada on the rise, fixed rates will rise as well. However, those currently in fixed rates have nothing to worry about until their next mortgage renewal date.”

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