Should I refinance now, within this pandemic environment?

Everywhere you turn right now, mortgage brokers and banks have been promoting numerous ads and promotions encouraging Canadians to refinance. The reason there is noise in the market about refinancing, is the Bank of Canada is holding the policy rate that lenders follow, at 0.25%. Given we are in a pandemic, Canadians are spending less on luxury items such as vacations and upscale outings, leaving them with more disposable income. Unfortunately, people seem to be spending more on other items, when they could be using the extra money to pay down their existing debt.

Both banks and mortgage brokers appear to be pushing refinancing to consumers, but is it really a good time to make this decision?

Given we’re in a low rate environment, the impact to homeowners is, there is a lot value in reviewing your personal situation and affordability before making any decisions.

Why you should care about the low interest rate environment

If you look at the landscape of rates being offered in Canada today, they are the lowest they have been for a long time. For example, a 5-year fixed rate of less than 2% is being offered by top lenders such as Scotia Bank and TD. You are also seeing 10-year fixed rates as low as 3% (or less for this particular term) being offered by top and niche lenders within Canada. Not to overstate the obvious but in addition to looking for lower rates, check if they have these flexible features:

• Ability to refinance without penalties and drop to a lower rate now.
• Be close to the maturity of your existing mortgage deal and be able to negotiate with your existing lender as they would not want to lose you to a competitor.
• Low penalty fee, which may be worth paying to save more in the long run.

If refinancing is something you want to pursue, we suggest you take the time to complete the following steps:

1. Review your terms and conditions, as this will allow you to identify what your options are. Before going to your bank or your personal broker, understand your product better and the rules around what you can do (e.g. the flexible features described above).
2. Once you are ready to go see your bank or personal broker, make sure you have all of your financial documents in good order and all of your latest statements. This is important as they will be asking about your current position, affordability, and if any material financial obligations have arisen since your last sit down, since all this will impact your options.
3. Have a list of things that are important to you when managing your mortgage. This will help your advisor ensure they find the right product for you. For instance, if you know that you will be financially strained for a while, they can suggest a solution that works for your situation, such as fixed payments. However, if you know that your income will increase in the near future, you will have the ability to pay down more of your debt, this may impact their product selection for you.
4. Also, if you are in a position where you are trying to balance paying off debt and growing your savings and investments, bring your strategy to the conversation, as it will impact the decision process of refinancing or not.

Oh, and in case you’re wondering—just because mortgage interest rates are crazy low right now, that doesn’t mean you should roll up all your other debt (credit cards, student loans, etc.) into a refinanced mortgage. Before you take steps to tackle your outstanding debt, talk to an advisor to help you understand your options. It is hard to assess which debts to clear off first, as you need to first understand your breakage fees, penalties, and other terms you should be mindful of before taking any action.

What is refinancing?

Refinancing is the process of applying for a new mortgage, which provide different terms, rates, and sometimes with a different lender. Most people refinance for many reasons, such as:

1. There is an ability to save money by refinancing (e.g. a lower rate).
2. There has been a material change in the family and you need to adjust your current terms to accommodate.
3. Access to the equity available within the home to help consolidate debt, renovate your property, help a relative financially, or fund an investment opportunity.

Refinancing does not mean you end up with two mortgages! Instead, the initial loan is paid off through refinancing and a new loan is created in its place.

Things to keep in mind when refinancing

There are many reasons to refinance, whether you want to make a less-than-desirable mortgage payment better or consolidate debt with a lower interest rate.

Do a break-even analysis to see if refinancing is worth doing in your situation. A break-even analysis means running the numbers on whether you’ll be in your home long enough to benefit from the savings that a lower interest rate and payment bring.

Then you should work out how long it’ll take you to make up the closing costs you’ll have to pay for your refinanced mortgage. Yes, there will be closing costs!

In general, refinancing makes the most sense if you fall into one of these categories:

1. You have a variable rate mortgage and/or the terms within your mortgage allow you to break early and without penalties.
2. Your mortgage has passed the 15-year mark as refinancing is a good way to secure a fixed-rate mortgage. The hope is the new payments are no more than 25% of your take-home pay.
3. You have a high interest rate loan and by breaking now and securing a lower rate, the payments are much lower and the amount of interest you are paying reduces substantially. In addition to a rate reduction, you should also factor in the breakage fees and other penalties to assess if you would break-even.
4. You have a second mortgage that has a high rate and by consolidating your debt, it will bring down the overall interest that you are paying out to the lender(s).

To help you through this process of trying to find the right lender with whom you can discuss your refinancing needs, click on our link below to search, compare, and discuss your needs with a lender of your choice.

The tips within this blog are here to guide you as you explore options to enhance your personal position. Nothing within this blog is to be considered advice in any shape or form. If you require tailored advice, it’s recommended to connect with a mortgage specialist, by clicking here now.

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Nilay Lad

Co-founder, Advisor & Guest Blogger

Nilay holds 14+ years of experience in developing and delivering strategies to grow and digitise banks through proposition development and improving customer experience.