Refinancing during COVID-19 is a topic that many clients are discussing with us as we make our way into month three of this pandemic. Refinancing can be a way to aid in managing your monthly costs. It can also be a way to get into the market if your position allows you to.
A survey was conducted on April 6 by TransUnion on the current financial status of 1,035 Canadian adults in the wake of COVID-19. The results released showed that 68% are concerned over their ability to pay loans and bills, and that the average respondent will fall behind on monthly debts in 6.4 weeks. The survey also found that 63% of Canadians have been negatively impacted financially, with 25% due to job loss and 10% being small business owners who have had to slow down or completely close operations.
During this time of financial disruption people are looking for alternative solutions.
A popular option in the past has been to refinance homes to either take advantage of lower interest rates or to pull out equity as a source of extra funds. But in an unprecedented situation like the one we’re now dealing with, the refinancing landscape can look quite different for investors.
Does Refinancing During COVID-19 Work the Same Today?
The short answer: It depends. Everyone’s situation and circumstances are different, but qualifying is not as easy as it was before. In the wake of the COVID-19, refinances have been tougher for Canadians for a few reasons.
Due to declining employment, lenders are more wary when it comes qualifying income. With record job losses in March and the outlook of Canada’s future unemployment rate, lenders are digging deeper into current employment status and the stability of future income.
Most lenders will want to see all income documents upfront and will take into consideration the “essential service” status of the employment. If an applicant does not work in one of the essential service sectors, lender’s may require further proof of their employer’s plan to continue paying their salary.
If a borrower is self-employed they may also need to provide a description of their business, its current status, and reasonable proof that it can withstand the effects that will come with COVID-19. In addition, lenders will not use any temporary government benefits towards qualifiable income, but they recently started considering Child Tax Benefit as qualifiable income, which can be very helpful.
Although it is currently challenging to get new mortgages approved, banks are working to ensure that the majority of their existing purchase approvals are getting funded, with some lenders requiring all new loans to be insured. But refinances and mortgages with amortization periods over 25 years are uninsurable, making the risk greater for lenders.
Low Rates + Fixed Mortgages
The BoC lowered its target rate an unprecedented three times in March alone to provide support to the economy from the impact of the pandemic. Banks have followed suit, dropping prime to 2.45%. But fixed rates have gone up. Why is that?
Simply put, the banks have liquidity concerns due to mortgage payment deferrals and the overall fear of clients’ not being able to pay their loans. In response, banks have increased their spreads or offer less reduction in discounts, sometimes cancelling out the Bank of Canada’s rate cut altogether.
BoC has announced programs on the federal and provincial level that will inject liquidity back into the economy. Things will change and rates will adjust as we make our way through the effects and outcomes of this pandemic. Still, at this time, locking into a fixed rate does not make sense when variable rates are historically at an all-time low. If you are looking to lower your monthly mortgage payment a better solution may be to contact your financial institution and request to extend the amortization period of your existing mortgage.
HELOCs offer a lot of flexibility and come with few shortfalls, but banks are using the same qualification methods as with a first mortgage refinance, and those have become extremely stringent during the pandemic. Alternatively, private lenders also offer HELOCs of up to 75% LTV at higher rates and fees but with more flexible qualification standards.
While the world is changing and adjusting on a daily basis, the best approach to making decisions about refinancing during COVID-19 is to continue to educate yourself. Stay on top of the economic changes and programs available to you. Contact your mortgage broker for the best advice on financing your real estate assets. Most importantly do not let your financial decisions be influenced by stress, anxiety or fear.
If you’re looking for more information on refinancing or how to take advantage of some of the incredible opportunities in the market, simply fill out the form below – we’ll be in touch right away.