With the Bank of Canada’s key rate now at 0.25 per cent, it’s no surprise that many Canadian homeowners are checking to see if mortgage rates are dropping in response. However, before rushing to refinance your home, give some serious thought to the reasons you are doing so — and the costs compared to the benefits.
For many Canadians, it may be the first time they’ve thought about their mortgage since it was approved, aside from making their monthly payments.
“People are so relieved to get a mortgage approved, they put them in a safety deposit box or a drawer and don’t look at them again,” says Kelley Keehn, author of “Talk Money to Me” and a financial educator.
“Your mortgage should be a living, breathing thing that you look at and consider to see what it can be doing for you. It should not come as a surprise how much interest you are paying over the life of the mortgage.”
During the COVID-19 crisis, with Canada’s unemployment rate for March at 7.8 per cent, many Canadians are looking for opportunities to lower their expenses or access additional funds. Mortgage refinancing may be one solution, but first the borrower must qualify — and that generally requires a job and steady income.
“When you do refinance now, you must be working,” says Darlene Hanley, a mortgage agent with the Hanley Mortgage Group in Toronto. “For anybody wanting to refinance now, lenders want proof of employment up front. For any refinancing request past March 25, they want a recent job letter.
“And if you have already deferred your mortgage payments, you can’t switch.”
If you are afraid you might lose your job and want to leverage your home equity before that happens, expect a lender to look at that possibility, too, Hanley says. “It’s not as easy as it was before.”
Robert McLister, mortgage editor at Rates.ca, says Google trends have shown that searches on refinancing are at an all-time high: “People are worried about their financial safety net.”
Nonetheless, McLister says, mortgage rates may not be as low as borrowers expect, because lenders are themselves paying more for the funds they loan, which drives the rates higher. He says it’s essential to run the numbers, and that includes considering the penalty you may pay for breaking your existing mortgage. Potential borrowers need to look at the time remaining on their current mortgage, the interest they are paying now compared to what they would save and the closing costs involved in refinancing.
Look at your current mortgage to see how many years are remaining on the term. Plug that number into an online rate-comparison calculator, looking at your current rate and rates being offered today to determine what you would save in interest. Then, subtract your closing costs — about $ 1,000 — and any penalty to see if refinancing makes sense for you.
If you do decide to refinance, McLister notes that often the mortgages offered by the Big 6 banks are 30 to 40 basis points higher than those from small lenders, so over the life of a mortgage, you can save a good amount of money.
“Do as much research as you have time for,” McLister suggests. “Go online, check rate sites and read the fine print. See whether the mortgage is portable, in case you need to move. Look at the total borrowing cost, not just the lowest rate.”
Keehn notes that if your mortgage is up for renewal within three to six months, you can ask your bank to hold its current low interest rate for you.
“Banks can hold a favoured interest rate for you and most will do so for 120 days,” she says.
If refinancing isn’t an option, homeowners can also look at obtaining or extending a home equity line of credit (HELOC), a credit line that is secured by home equity that is paid back at your mortgage interest rate, rather than the rate you’d pay on a credit card.
“A HELOC can be a great emergency tool,” says McLister. “It gives you liquidity while there’s a crisis.”
However, both Hanley and Keehn are more cautious about HELOCs.
“If you don’t need it, don’t get it,” Hanley says. “Ride this out and don’t add more expense to your life.”
The Financial Consumer Agency of Canada warned Canadians in 2017 not to “use their homes as ATMs,” Keehn said. The agency reported at the time that 40 per cent of Canadians don’t make any payments toward their line-of-credit principal and most don’t pay off the HELOC in full until they sell their homes.
“HELOCs are at a low interest rate if they are secured to your home, so it may seem like cheap or free money, but you still have to pay it off,” Keehn said.
Get the latest in your inbox
Never miss the latest news from the Star, including up-to-date coronavirus coverage, with our free email newsletters
Sign Up Now
One good result seems certain to come out of the COVID-19 pandemic, Keehn noted:
“This crisis will teach us to pay more attention to our mortgages.”
Correction – April 22, 2020: This article was edited from a previous version that misstated the name of the online publication Robert McLister edits.
JOIN THE CONVERSATION
Have you thought about refinancing your mortgage? Why or why not